UBS problems to remain after $3.5 billion capital hike

ZURICH/BASEL (Reuters) - Investors welcomed UBS (UBSN.CH) plans to raise 3.8 billion Swiss francs ($3.5 billion) of new capital but said the bank will not turn the corner until it stems client withdrawals and settles U.S. legal problems.

UBS , the world's largest wealth manager and one of the hardest-hit major banks in the financial crisis, said late on Thursday it was to place 293.3 million new shares at 13 francs with a few big institutional investors.

The Swiss National Bank and banking regulator FINMA have indicated they want UBS to strengthen its capital base before the government withdraws a 6 billion Swiss francs ($5.5 billion) investment made in October to bail out the bank.

"We welcome that the bank has strengthened its capital base," FINMA head Eugen Haltiner told Reuters on Friday on the sidelines of a banking event in Basel. "We can call the bank well capitalized ... The bank is now prepared to weather an unexpected difficult economic scenario."

UBS stock, which fell 6 percent on Thursday to 13.97 francs, was down 1.4 percent to 13.78 francs at 0920 GMT. The European banking sector was up 1.4 percent.

"UBS had to enhance its capital base after U.S. banks' capital hikes and due to the high capitalization of its main competitor in Switzerland, Credit Suisse ," Vontobel analyst Tobias Bruetsch said.

"The capital raising should help restore confidence," he said, adding the dilution amounted to about 10 percent.

UBS said the share placement would help increase its tier 1 capital ratio -- a key measure of financial strength -- to a proforma 11.9 percent from 10.5 percent at the end of March, almost at the 12 percent new minimum required by FINMA.

Credit Suisse said in April its tier 1 ratio was 14.1 percent, making it one of Europe's best capitalized banks.

NEGATIVE NEWS CONTINUES

Analysts said they were not surprised UBS said it would likely post a second-quarter loss although the bank also said its operating results, helped by improved investment banking conditions and lower losses and write-downs, should be better.

However, investors were disappointed the bank said it has seen net client outflows in its three wealth and asset management units so far this quarter.

"We find it extremely disappointing that the bank suffered another loss, albeit apparently lower than the 2 billion franc loss for Q1," said Kepler Capital Markets analyst Dirk Becker.

"Even more disappointing was the fact that net new money flows were negative again."

A string of negative headlines about UBS in the past year has prompted big client withdrawals, particularly over a U.S. case seeking the names of 52,000 Americans suspected of using the bank to hide nearly $15 billion in assets from the taxman.

The U.S. Justice Department denied earlier this week it was planning to drop the case and said it would file a brief seeking an enforcement of the summons on June 30 although it was still willing to consider a settlement.

Merrill Lynch analyst Derek de Vries said that to turn positive on UBS he wanted to see net new money inflows, a disposal of the Swiss government stake, a resolution of the U.S. tax case and a clearer communication of strategy by management.

"The decision to raise 3.8 billion francs in the market doesn't change our investment thesis as we continue to worry about a number of issues at the bank," he said.

Switzerland said earlier this month it was in talks over its investment in UBS with various parties but had not yet decided to convert its mandatory convertible notes -- that would give it a 9.3 percent stake in the bank -- or sell them.

In connection with the capital raising, the government said it had agreed not to sell any UBS shares before August 4 -- when second-quarter results are due -- without UBS's consent.

SNB Vice-Chairman Philipp Hildebrand said last week a sale of the government stake could be a positive signal but everything had to be done to improve UBS's resilience first.

"It's certainly something the national bank welcomes," SNB spokesman Werner Abegg said on Friday. "UBS's resilience has been improved in times when the economic situation could make things difficult."

(Additional reporting by Rupert Pretterklieber; Writing by Sam Cage and Emma Thomasson; Editing by Greg Mahlich and Dan Lalor)

($1 = 1.099 Swiss francs)