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ZURICH (Reuters) - UBS will revamp its corporate structure to ensure it can be broken up more easily in a crisis, cutting the amount of money it must set aside for potential losses and allowing it to pay shareholders a special dividend.
The Swiss bank will swap shares into a new group holding company, meaning its businesses could be separated more easily if one ran into trouble without jeopardizing the others, preventing a repeat of 2008 when Swiss taxpayers had to save the bank from huge losses in the United States.
Switzerland's largest lender has overhauled its business since the financial crisis, cutting back on risky debt trading made more expensive by tougher regulations and putting it a step ahead of rivals such as Barclays which is still grappling with how to retool its investment bank at the center of a drop in profits in the first quarter.
Chief Executive Sergio Ermotti said UBS's success in shrinking its investment bank and focusing on its less-risky private bank would help it to drive returns for shareholders.
"Our performance has proven that the model works," Ermotti said in a presentation to analysts and investors in Zurich on Tuesday. "We intend to return any excess of capital that we don't need to support our own business."
UBS beat analyst expectations with a 7 percent rise in first-quarter net profit to 1.05 billion Swiss francs ($1.20 billion). However, the jump, due to cost cuts and a lower tax rate, masked a drop in earnings from wealth management and investment banking.
Analysts had expected net profit of 905 million francs, according to a Reuters poll, yet the underlying numbers failed to impress them.
"The investment bank missed our forecasts. Private banking shows strong net new money, but profitability can still be improved," said J.Safra Sarasin analyst Rainer Skierka, who rates UBS shares a "buy".
Despite the weak underlying performance, UBS shares rose more than 1 percent as investors homed in on the special dividend of 0.25 francs a share they will receive for swapping their shares into the new holding structure.
"It is the capital return part of this story that makes it exciting and that is performing ahead of expectations," said Citigroup analysts, who also have a "buy" rating on the stock.
UBS is sticking to a target for a 15 percent return on equity, up from 8.7 percent currently, by 2016 as it seeks to cut 2.1 billion francs in costs.
Investment banking profits fell more than half compared with a year ago due to a slide in income from trading in equities, foreign exchange, interest rates and credit revenue.
Personnel expenses, meanwhile, rose 38 percent at the investment bank from the end of the year, largely due to an increase in bonuses to staff.
UBS said it now aimed for a cost-to-income ratio at the investment bank of between 70 and 80 percent, compared with 65 to 85 percent previously. It will no longer target 10,000 job cuts, unveiled as part of its three-year restructuring plan in late 2012, although it will continue to reduce headcount which has been cut by around 3,400 over the past year and a half.
Pretax profit at UBS's private banking division fell 7 percent from a year ago even though it won 13 billion francs in fresh money from clients in the quarter. The new money implies 4.9 percent growth, against a target of up to 5 percent.
Costs at the private bank rose 6 percent from a year ago and the bank said it would be more ambitious in getting such expenses down, targeting a cost-income ratio of 55 to 65 percent from 60-70 percent previously.
UBS said it aimed for more than 1 billion francs in pretax profit from asset management in the medium term, up from 576 million last year, in part by selling more products to private banking clients and spending cuts.
To satisfy regulators' demands for separate legal entities in different regions, UBS plans to break with its existing structure in which a parent company holds a host of interconnected branches. That model meant the entire business had to be rescued by Swiss taxpayers when it ran up more than $50 billion in U.S. mortgage losses.
Instead, it will create standalone entities including a new Swiss subsidiary, a separately capitalized unit for its UK business and a holding company for its U.S. operations.
The bank is within striking distance of paying out at least half of profits to shareholders if it can maintain capital - which stands at 13.2 percent under new global rules - at or above current levels through to the end of 2014 and achieve a ratio of 10 percent when applying its own stress tests.
Bigger dividends are the goal of UBS's three-year drive to shrink its investment bank and abandon riskier activities such as bond trading, where a slowdown hit rivals including Credit Suisse in the quarter.
Its shares have risen 46 percent since it announced a restructuring in late 2012, compared with 36 percent at Credit Suisse, which has maintained a focus on investment banking.
Both Swiss banks have beaten an index of European banks, which rose just over 30 percent in the same period.
Additional reporting by Joshua Franklin; Editing by Carmel Crimmins, Tom Pfeiffer and Mark Potter