TAX NEWS - 2010

Swiss Tax: UBS helped dodge taxes

ZURICH, June 18, 2010 -- UBS boss Oswald Gruebel can finally focus on attracting client money after lawmakers backed a key tax treaty and ended months of uncertainty that had threatened a recovery at Switzerland's biggest lender.

Swiss parliament gave its support on Thursday to a treaty to give the U.S. government details of clients UBS helped dodge taxes, which analysts said removed the last obstacle to the straight-talking German banking veteran in his quest to revive the fortunes of UBS, which hauled him from retirement after the state had to bail out the bank.

Gruebel last month assured investors client cash would stop gushing from the world's second-largest wealth manager by the end of 2010, as booming trading income pushed UBS to its biggest quarterly profit since he took charge during the credit crisis.

But concerns remained about the sustainability of the recovery as clients withdrew 18 billion Swiss francs ($16.20 billion) of their money from the bank in the first quarter, albeit at a far lower rate than in the previous quarter.

Parliamentary backing for the tax deal has changed that.

"It allows UBS to accelerate its efforts to restore its damaged reputation and to recruit people," Sarasin analyst Rainer Skierka said of support for the tax deal, which foresees the handing over of 4,450 accounts to U.S. tax authorities of clients UBS helped to dodge taxes.

"We also expect positive implications for the desperately needed turnaround into positive net new money growth," he said, adding the bank should be able to staunch the bleeding of client cash in the second half of 2010.

Experts say the management team of Gruebel, widely credited for turning around Credit Suisse in his previous job as head of UBS's main domestic competitor, has a solid foundation to build on in the third and fourth quarters with U.S. legal uncertainties cleared out of their way.

"Net new money should improve, gross margins should improve with all the initiatives they have taken and then there's fixed income, where they are still hiring people and still restructuring," said Vontobel analyst Teresa Nielsen, adding there was possibly more upside here than for U.S. peers or Credit Suisse.

Not approving the treaty would have put UBS's U.S. banking licence and assets at risk, said Asher Rubinstein, partner at New York law firm Rubinstein & Rubinstein.

"UBS can effectively close the book on this matter. It no longer wants the business of Americans, it is no longer going to facilitate tax fraud," Rubinstein said. "It can now concentrate on legitimate banking services and recouping its losses."


TIME TO FORGET

At the end of the first quarter Gruebel said UBS was on track to meet its medium-term goals of annual pretax profit of 15 billion francs and that improvement in wealth management would be gradual.

UBS spokesman Dominique Gerster said parliament's approval of the Swiss-U.S. tax deal was an important step in the bank's recovery, but declined to give an update on its net money outflow and profit targets.

Private bankers have left UBS in droves, taking many clients and their assets with them to other banks, and the U.S. taxman's attacks on UBS have left deep wounds that will need time to heal, analysts said.

"I think wealth management Americas still needs maybe a year's time to restructure and get the right people on board," said Vontobel's Nielsen.

UBS's wealth management operations outside Switzerland and the United States were already showing signs of recovery, as the number of client managers leaving the bank slowed in the first quarter, but it would take until the fourth quarter to stem the leaking of client money in the United States, she said.

"It takes time for people to forget again. I think it's a gradual process," she said.

The loss of a further 3 billion francs of U.S. client money will drag the bank to a 1 billion franc net money outflow in the third quarter, Nielsen forecasts. But the group should see 6 billion francs of net new money in the fourth quarter as U.S. wealth management stops the rot and client confidence returns.

Now the bank can also shift its focus to other issues it faces as the financial landscape changes after the crisis.

UBS may have to double its own capital if Swiss regulators put in place the reforms currently under discussion to prevent banks from becoming too big to fail, Gruebel warned on Friday.

"UBS still faces many uncertainties as regards regulation and taxation, but at least it does so now with the rest of the global banking community," said Helvea analyst Peter Thorne. ($1=1.111 Swiss Franc)