Swiss bank UBS reported faster than expected progress in overhauling its investment bank but its flagship wealth management unit performed disappointingly, weighed down in Europe where Switzerland is under fire for helping tax cheats.
UBS announced a 1.89 billion Swiss franc (1.32 billion pounds) net loss for the fourth quarter on Tuesday following a big fine for rigging benchmark interest rates, although this was less than the 2.078 billion analysts had expected on average.
Switzerland's biggest bank also said it was cutting overall bonus payments to its staff, with the maximum individual payout halved to one million francs.
UBS announced plans in October to fire 10,000 staff as it returns to its private banking roots and ditches much of the trading business that lost $50 billion (32 billion pounds) in the financial crisis and prompted the rate rigging fine.
"We are on track with the transformation of the Investment Bank," said UBS chief executive Sergio Ermotti.
UBS shares were volatile, trading down 0.8 percent at 10.54 a.m. British Time, compared with a 1.1 percent firmer European banking sector index.
"Investors who buy UBS shares do so for the medium term transformation of UBS from a universal bank into a wealth manager, and the subsequent re-rating/capital return it should deliver," said Sarasin analyst Rainer Skierka. "UBS is on track to achieve its goals. This has also been underlined with a 50 percent increase in its dividend."
The dividend rose to 0.15 francs from 0.10 for 2011.
UBS had already flagged it was on track for a hefty loss in the quarter due to the $1.5 billion fine it agreed in December for rigging Libor and other benchmark interest rates, as well as charges from its restructuring plan to shed staff.
UBS will buy back 5 billion francs in senior debt in coming weeks, after the scaling back at its investment bank sharply reduced liquidity and funding needs, although it said that could result in "significant" first-quarter own credit charges.
Despite the upheaval, the investment bank's revenues for advisory services rose 8 percent and those from capital markets were up 14 percent, even as it slashed risky assets by 19 percent to meet tough capital rules.
Regulators tightened the rules in response to the banking crisis of 2008-09, when the Swiss state had to bail out UBS.
UBS said it had cut risky assets to 258 billion francs in the quarter from 301 billion the previous quarter, already in sight of the target of 200 billion francs it set for 2017.
"It is reassuring that there are, thus far, apparently very low losses on exiting the non-core assets," said Andrew Lim of Espirito Santo.
PRIVATE BANKING MIXED
Results from the flagship private bank, which caters for wealthy individual clients, were mixed. Investors moved in funds in fast-growing markets such as Asia and the business in the Americas achieved its strongest performance since the last quarter of 2007, just before the crisis.
However, withdrawals by clients in western Europe sped up towards the end of the quarter, UBS said. Overall, a net 2.4 billion francs flowed in, missing forecasts of 6.8 billion.
UBS has warned it could lose 12-30 billion francs from total European assets of over 300 billion as a result of steps to stop foreigners using secret Swiss accounts to evade taxes.
Chief financial officer Tom Naratil said Germany's rejection mid-December of a tax deal with Switzerland had contributed to the outflows.
Dirk Becker, analyst at Kepler Capital Markets, noted the gross margin of the wealth management business fell to 85 basis points, a level last seen when clients stopped trading in the depths of the financial crisis in late 2008.
"The stock trades at 1.3 times (book value), a substantial premium to the sector which is not justified through superior returns or positive business trends," he said.
Vontobel analyst Teresa Nielsen said private banking appeared to be picking up overall. "We believe the impact from tax matters is getting solved. We understand that wealth management has seen a good start of the year and expect the gross margin to have reached its floor," she said.
UBS said it will cap cash paid as a bonus to 1 million francs from 2 million formerly. Overall, its bonus pool for 2012 was falling by 7 percent to 2.5 billion francs and introducing a scheme to pay bankers with loss-absorbing capital which are revoked if capital targets are not met.
Deutsche Bank is capping bonus payouts for 2012 at 300,000 euros for employees, not including deferred pay, sources told Reuters on Friday.
UBS's hometown rival Credit Suisse, where investment banking makes a larger share of profits, reports quarterly results on Thursday. Unlike UBS, Credit Suisse is holding fast to its securities unit, even as it adapts to tough capital rules that make it harder to turn a profit from trading.
So far, investors have shown a preference for Credit Suisse's stance, sending its stock 23 percent higher since November, when UBS unveiled its strategy. UBS's shares, meantime, have gained 15 percent.
(Writing by Emma Thomasson; editing by David Stamp)