Published: Tuesday, 17 Nov 2009 | 1:37 AM ET

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Swiss bank UBS does not expect a recovery of client inflows anytime soon as it continues to struggle to rebuild its reputation after a bitter U.S. tax row even as its underlying performance improves.

Higher-than-expected accounting charges pushed UBS into its fourth consecutive quarterly loss as it reported disappointing total outflows of 36.6 billion Swiss francs ($35.81 billion) at its key wealth and asset management divisions.

"The brand has been more hit by reputation issues than expected especially in the Americas," Vontobel analyst Teresa Nielsen said in a client note.

UBS's results contrast with stellar profits seen at European peers Credit Suisse and Deutsche Bank as UBS has exited several business lines while pushing through a tough restructuring.

"The performance at the investment bank shows sign of recovery, but significant questions remain on the wealth management front as outflows were larger than anticipated," said Sebastien Lemaire, an analyst with Natixis Securities.

UBS shares fell 4.0 percent to 16.65 Swiss francs, underperforming a 2.1 percent weaker DJ Stoxx European banking index.

UBS's net loss of 564 million Swiss francs ($552.4 million) was narrower than a net loss of 1.4 billion Swiss francs in the second quarter but larger than average Reuters analyst forecasts for 207 million.

"We do not expect an immediate recovery in client net new money flows," Chief Executive Oswald Gruebel and Chairman Kaspar Villiger, both appointed earlier this year to turn around the Swiss bank, said in a letter to shareholders.

But they noted that pretax operating profit excluding charges nearly doubled to 1.6 billion francs, signaling the crisis-hit bank was gradually on the mend.

Sharon Lorimer

"UBS expects to see further progress in restoring the underlying profitability of the business in future quarters, particularly in 2010," they said.

Analysts had been looking for signs of recovery at UBS's core wealth management division, which has suffered persistent outflows while it struggled to emerge from the subprime crisis and was also hit by a high-profile U.S. tax litigation.

UBS settled on Aug. 19 the U.S. lawsuit, in which Washington accused it of helping rich Americans hide money in Switzerland, and last week hired Merrill Lynch veteran Robert McCann to try to rebuild its U.S. franchise.

Investment Bank Improving

Profitability at UBS's investment bank improved in the quarter, but was overshadowed by accounting charges totaling 2.15 billion francs. These included an own credit charge of 1.436 billion and a net loss of 409 million on its sale of it Brazilian Pactual business and charges related to the conversion of the notes issued to the Swiss government after the bank got state aid.

Switzerland sold its UBS stake in August.

Outflows at the Wealth Management and Swiss Bank division, were as large as in the previous quarter, with less withdrawals among offshore clients and renewed outflows among Swiss clients.

Outflows at the troubled Americas wealth management division accelerated to nearly 10 billion francs, almost twice as much as in the previous quarter.

In asset management, UBS did better than in the previous quarter, but outflows were still worse than analyst forecasts. UBS's Tier 1 ratio, a measure of a bank's financial strength, rose to a solid 15.0 percent at the end of third quarter against 13.2 percent the previous quarter.

A year earlier, UBS turned a small quarterly profit, mainly due to tax credits, but still ended 2008 with the biggest annual loss in Swiss corporate history.

Shares in UBS have gained around 16 percent since the start of the year, while shares at Credit Suisse, now slightly larger than UBS by market value, have nearly doubled.

The DJ Stoxx European banking index has gained nearly 50 percent this year.

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