* Q4 net loss 1.89 bln Sfr vs 2.078 bln loss in Reuters poll
* Private bank net new money 2.4 bln Sfr, misses 6.8 bln forecasts
* Unit posts 85-basis point gross margin, missing 95-105 point goal
* Bonus pool cut; bankers to be paid in loss-absorbing capital
* Cap on individual bonuses halved to one mln francs
* Bank shed 1,100 staff in Q4; another 1,900 set to go by Q3
By Katharina Bart
ZURICH, Feb 5 (Reuters) - 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 ($2.08 billion) 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 in the financial crisis and prompted the rate rigging fine.
"We are on track with the transformation of the investment bank," chief executive Sergio Ermotti told a news conference in Zurich.
UBS shares traded down 0.13 percent at 1625 GMT, lagging 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 was raised to 0.15 francs from 0.10 for 2011.
UBS had already flagged the 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 the coming weeks, after the scaling back of its investment bank sharply reduced liquidity and funding needs; 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 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.
The fourth quarter was "favourable" for offloading assets but will be more difficult to notch up further easy successes as the focus shifts from selling cash assets to derivatives, USB financial chief Tom Naratil told Reuters: "We had a great head start," he said. "But we have a lot of work to do."
Results from UBS's flagship private bank, which caters for wealthy individual clients, were less buoyant. Investors added assets 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.
Naratil said outflows were spurred in part because clients grew more aware of the risks of not declaring assets, notably through media coverage of debate in Germany on possibly taxing the Swiss accounts of German citizens.
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.
UBS's Naratil said the bank was still "comfortable" with its 95- to 105-basis point goal for gross margin in the wealth management business, though it might take years to reach that level again barring a credible solution to fiscal problems in the United States and Europe.
Those issues kept UBS's wealthy clients from trading, with nearly one third of assets in low-margin cash products instead.
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 cut by 7 percent to 2.5 billion francs, and the bank introduced a scheme to pay bankers with loss-absorbing capital which is 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.
Of the total 10,000 jobs slated to go under the bank's restructuring, UBS shed roughly 1,100 in the fourth quarter. A further 1,900 employees were given notice and are expected to leave by the third quarter.
UBS's local rival Credit Suisse, where investment banking accounts for 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 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.