* Fund buyback from SNB will add 90 basis points to capital
* Cautions on Q3 revenue amid debt, euro zone worries
* UBS cut 1.8 bln Sfr in spending vs 5.4 bln Sfr target
* Shares biggest gainers among European banks
By Katharina Bart
ZURICH, July 30 UBS will buy back a
fund set up to purge the Swiss bank of toxic assets, drawing a
line under a humiliating state bailout in 2008 and raising the
prospect of an early increase in dividends.
Switzerland's largest bank by assets has overhauled itself
following the financial crisis and a series of high-profile
scandals, abandoning risky fixed-income activities, hiving off
loans and raising capital, to restore its reputation.
The fund buyback will boost the bank's capital defences,
distinguishing it from rivals such as Britain's Barclays
, which on Tuesday said it would tap shareholders for
5.8 billion pounds to boost its capital.
Deutsche Bank, meanwhile, pledged to cut risky assets to
help shield itself from future losses.
"The results show that our strategy is right and we're ahead
on execution," UBS Chief Executive Sergio Ermotti said in a
UBS's shares rose 2.8 percent to 18.24 francs on Tuesday,
the biggest gainer on a lower European banking index.
The stock hit a two-year high last week after the bank
disclosed a quarterly profit that beat forecasts, even after
paying $885 million to settle a lawsuit with the U.S. housing
regulator over the mis-selling of mortgage-backed bonds.
After a disastrous foray into U.S. mortgage securities
brought UBS to the brink of collapse in 2008, roughly $38.7
billion of toxic assets were offloaded to a fund managed by the
Swiss central bank as part of a state bailout.
The assets, which the Swiss National Bank has been selling,
have since staged a turnaround and added 316 million Swiss
francs to the central bank's first-half results.
UBS will repay a central bank loan, now worth about 1.2
billion francs, and buy the bailout fund back in the fourth
quarter, a year earlier than many analysts had expected.
A buyback would currently cost 2.5 billion francs but that
will change as the fund's assets rise or fall in value ahead of
the purchase date, UBS said.
The move will boost UBS's capital ratios by taking on the
cash and securities remaining after the loan is repaid.
UBS didn't comment on the effect the repurchase will have on
its dividend policy beyond saying it will return to substantial
payouts once it hits a common equity tier one ratio, under Basel
III rules, of 13 percent, expected next year. That ratio is
currently 11.2 percent.
Analysts forecast a large jump in dividends next year.
"The important points for the UBS investment case are that
the capital ratio continues to strengthen and therefore a return
to high dividend pay-outs could even come earlier than in our
estimates," Helvea analyst Tim Dawson said.
UBS paid out 0.15 francs per share last year and has pledged
to pay out more than 50 percent of profits to investors from
CAUTIOUS ON Q3
The bank's second-quarter performance was driven by buoyant
equity markets but in its outlook on Tuesday, UBS said
third-quarter revenue and net new money - a closely watched
bellwether of future business - may be hit as clients fret about
the euro zone, U.S. debt trouble, and a mixed global economic
Despite the cautious tone, the bank said it was confident
its flagship private bank, the largest in the world, would
continue to attract new money.
UBS is relying more on its private banking business after
the financial crisis forced it to abandon ambitions of being a
big-league investment bank.
Home-town rival Credit Suisse is sticking with its
large investment banking operation but its reliance on fixed-
income trading hits its shares last week amid fears higher
interest rates could hurt that business.
As part of its restructuring, UBS has so far cut spending by
1.8 billion francs. It is aiming to axe 5.4 billion francs by
2015. It shrank its balance sheet by 20 billion francs in the
"The wealth management division is still attracting strong
inflows and the group has already put U.S. tax-related affairs
behind it," said Dawson, who rates UBS at accumulate with a 19.3
franc price target.
Credit Suisse and Julius Baer are among a dozen
Swiss banks under investigation by U.S. prosecutors for helping
wealthy Americans evade tax, an investigation spawned by a U.S.
crackdown on UBS, which the bank settled in 2009.