UBS still faces hurdles in US after tax deal

UBS AG is leaving one problem behind with the settlement of its tax row with the US government, but the bank's Americas wealth management unit still faces headwinds that could force a sale.

The agreement to avoid a trial over the disclosure of the identity of 52,000 American clients with Swiss accounts could, over time, help the world's second largest wealth manager contain a recent outflow of money from its US unit.

However, the world's second largest wealth manager is still suffering losses in its US division, and cutting jobs at a time when some rivals are making hefty gains, and expanding.

"The underlying problems remain," said Christian Stark, an analyst at Cheuvreux in London, who said some money advisers have left UBS and could take their clients to rival firms, extending the money outflow for a couple of months. "Eventually there will be some stabilization, but the outflows are likely to continue for some time."

UBS increased its presence in the United States in 2000 with the $10 billion acquisition of PaineWebber Group, a brokerage firm with over 8,500 brokers and $500 billion in client assets.

But the business never was as profitable as UBS expected, as it suffers from higher costs and thinner margins than the lucrative Swiss business.

It has also been hurt by executive departures, bad bets on auction rate securities and writedowns, regulatory setbacks and the Justice Department tax avoidance probe.

In February, UBS agreed to pay $780 million to settle criminal charges in a similar dispute with the US government. The bank agreed to hand over data on about 250 US clients, and promised to close its offshore business to US clients.

The new deal could make it harder to attract customers, limiting growth at a key moment of consolidation among rivals, as the pact to disclose the identity of customers could lessen the degree to which Swiss bank accounts can retain their prized confidentiality.

"The Swiss privacy was the distinction they held in the marketplace. If I were to think longer-term, it may be one less reason to do banking business with UBS," said Keith Wirtz, president and chief investment officer of Fifth Third Asset Management in Cincinnati, Ohio.

"There is reputational damage," said David Williams, an analyst at Fox-Pitt Kelton in London.

UBS Wealth Management Americas saw net new money outflows of 5.8 billion Swiss francs ($5.5 billion) in the second quarter, compared with net new money inflows of 16.2 billion Swiss francs in the first quarter.

The division also recorded a pretax loss of 256 million Swiss francs in the first six months of 2009. That is narrower than a first half pretax loss of 567 million Swiss francs, but both periods' results were thrown off by one-off factors.