UBS profit beats but hurt by new capital demands

Market is 'challenging and volatile': UBS CEO

UBS third quarter profit slightly beat expectations on Tuesday but growing provisions for litigation signal the Swiss banking giant still faces regulatory issues.

UBS reported third quarter net profit of 577 million Swiss francs ($644.2 million) on Tuesday, above expectations of 537 million Swiss francs.

The results include charges for provisions of 586 million Swiss francs for litigation, regulatory and similar matters, the bank said.

"We're being quite up front about our litigation issues, both in our litigation report and also in our language in the past quarters. We have been expecting, and we continue to expect, high litigation charges for the industry and for us," UBS CEO Sergio Ermotti told CNBC.

The bank warned, however, that the Swiss regulator wants it to hold more capital. It imposed a temporary 50 percent add-on to the capital the bank does hold against risk-weighted assets to cope with potential litigation and other risks.

As a result the group is delaying its target of return on equity of 15 percent by 2015 by at least one year. Shares in the bank were sharply lower in early trade, down over 6 percent.

Ermotti said the bank would still be the best capitalized bank among its peers despite the add-on and he expected it to be phased out as the bank addressed litigation and other operational risk issues. "We are able to absorb those kinds of issues," he said.

"I think that this will not divert us from our goal and we will reach our 13 percent [Basel III capital ratio] target at the end of next year and still once we achieve that target we will have a payout ratio of 50 percent."

He added that the third quarter was "challenging" for the bank but he was pleased with the performance of the investment bank in particular.

"We are very pleased with the way our last nine months have been developing. I think the performance is good across the board in all segments but particularly the investment bank," he said. "I think that the market out there is still very challenging, I think it is very volatile."

The bank faces another challenge, however, following media reports earlier this year alleging the possible manipulation of foreign exchange trades. Ermotti defended the bank, which is conducting its own internal review into the claims, saying that UBS "swiftly took action in looking into the matter." He said the the group would take appropriate action and would work with authorities examining the matter.

The latest earnings come after a turbulent year for the bank as it tackled restructuring, redundancies, the Libor-rate scandal and the arrest last week of the former head of its global wealth management business.

Last October, UBS announced massive restructuring plans including the axing of up to 10,000 jobs. It has also focused on shifting away from risky trading in its investment banking division toward its wealth management operations.

(Read more: We're half way through job cuts: UBS CEO)

Then, in December, it announced it had been hit with a $1.5 billion bill from U.S., UK and Swiss regulators and admitted to one count of wire fraud in order to settle charges of manipulating global benchmark interest rates.

Documents related to the case revealed a macho trading culture at the bank and the U.K.'s financial authorities stating that at least 45 UBS employees in total knew of, or were involved in, the rigging of the rate.

(Read more: UBS traders' 'humongous' Libor-fixing boasts)

In a further twist, the Swiss bourse announced last week that it was launching an investigation into whether UBS had violated rules when it announced the restructuring and settlement of Libor-related claims though UBS denied any wrongdoing.

(Read more: Why this UBS investigation looks misguided)

Also last week, Raoul Weil, the former head of UBS's global wealth management business, was arrested in the northern Italian city of Bologna on charges brought in the U.S. that he helped thousands of Americans hide assets worth $20 billion in Swiss bank accounts.