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UBS's revamp progress to overshadow drop in Q1 profit

ZURICH, May 6 (Reuters) - UBS's progress in winding down unwanted assets, cutting costs and addressing risks associated with past scandals is likely to overshadow an expected drop in net profit when the Swiss bank publishes first-quarter results on Tuesday.

The bank is in the midst of a three-year drive to shrink its investment bank and abandon riskier activities such as bond trading, where a slowdown has hit rivals including Deutsche Bank . It plans to refocus on its private banking roots, a move it has said will allow it to pay richer dividends.

UBS has already chopped risky assets in half, making faster progress than expected and winning support from investors.

Its shares have risen nearly 46 percent since it announced its restructuring plan in late 2012, compared with more than 36 percent at cross-town rival Credit Suisse, which has chosen to stick with investment banking.

Both Swiss banks have beaten the European bank index , which rose just over 30 percent in the same period.

But analysts say UBS's progress in exiting riskier assets has masked shortcomings elsewhere. For example, it has fallen behind a target to cut costs by 5.4 billion francs ($6.2 billion) by the end of 2015, according to Citigroup.

"The bank 'only' achieved 2.2 billion francs in cost savings by the end of 2013, or 1 billion francs behind schedule," analyst Kinner Lakhani said.

Like many rivals, UBS also faces risks related to investigations into the industry's past misconduct.

Switzerland's financial regulator is requiring UBS to hold 22.5 billion francs in extra reserves against potential litigation and fines related to matters such as a global investigation into possible manipulation in the $5.3 trillion-a-day foreign exchange market.

The extra requirement caused the bank to defer a target to achieve a 15 percent return on equity.

"We need greater clarity on the forex manipulation probe and other outstanding litigation like mortgages, residual Libor litigation, and others, where settlements will reduce the surcharge over time," Morgan Stanley analysts said.

UBS is expected to report an 8.4 percent drop in first-quarter net profit to 905 million francs, according to the mean forecast of 10 analysts in a Reuters poll.

($1 = 0.8778 Swiss Francs)

(Reporting by Katharina Bart; Editing by Mark Potter)