(Bloomberg) -- UBS AG, Switzerland’s biggest bank, said gains at its investment bank fueled an increase in second- quarter profit and announced plans to buy back the fund set up by the central bank in 2008 to help it shed toxic assets.

The investment bank posted a pretax profit of 775 million Swiss francs ($833 million), compared with a 92 million-franc loss a year earlier, while earnings at the wealth-management division rose 11 percent to 557 million francs, the Zurich-based company said in a statement today. Net income increased to 690 million francs from 524 million francs.

UBS posted preliminary earnings last week that beat analysts’ estimates, even as it booked charges tied to an $885 million settlement with the U.S. Federal Housing Finance Agency over mortgage-backed bond sales. Chief Executive Officer Sergio Ermotti reported earnings that topped estimates for a second straight quarter after announcing plans to cut 10,000 jobs and scale back the investment bank to focus on money management.

“UBS is a beneficiary of stronger markets through faster deleveraging, improved capital markets revenues, and higher private banking activity,” Huw van Steenis and Hubert Lam, Morgan Stanley analysts with an overweight rating on UBS, wrote in a note last week. They predicted a faster-than-planned deleveraging and build-up of capital to allow UBS to make an “outsized” dividend payout in 2015.

UBS has risen 24 percent in Zurich trading this year, compared with an 8.4 percent increase in the 44-company Bloomberg Europe Banks and Financial Services Index.

Cutting Assets

Ermotti said in a Bloomberg Television interview that UBS will “try our best” to complete its deleveraging plan as quickly as possible. “We’re very focused and disciplined on executing our strategy,” he said, adding that the bank won’t deviate by paying a material dividend until it reaches a 13 percent common equity ratio under fully-applied Basel III rules, which UBS expects to happen in 2014.

The bank cut 20 billion francs of risk-weighted assets in the quarter, surpassing its target for the end of the year. That helped bringUBS’s common equity ratio under Basel III rules to 11.2 percent from 10.1 percent at the end of March.

“A faster non-core asset disposal means a cleaner UBS in future,” Matt Spick, a London-based analyst at Deutsche Bank AG with a buy rating on UBS, said in a note last week.

SNB Fund

The plan to acquire the Swiss National Bank’s fund will add 70 basis points to 90 basis points to the capital ratio in the fourth quarter,UBS said. A basis point is a hundredth of a percentage point. UBS said it doesn’t see any impact on earnings from the fund repurchase and expects it to add between 3 billion francs and 7 billion francs of risk-weighted assets.

The central bank’s fund was part of the bailout of UBS at the height of the financial crisis almost five years ago. UBS spun off $38.7 billion of risky assets into the fund, while the government provided 6 billion francs of equity and the SNB made a loan to support the assets as they were being run down.

As part of the agreement, UBS was granted an option to buy back the equity of the fund once the SNB loan was fully repaid. The bank agreed to pay the central bank $1 billion plus 50 percent of the value of equity exceeding that amount.

Investment Bank

Second-quarter revenue at the investment bank rose 60 percent from a year earlier to 2.25 billion francs. Revenue from equities sales and trading more than quadrupled to 1.11 billion francs and revenue from advisory and underwriting gained 12 percent to 771 million francs, while the foreign exchange, rates and credit unit reported a 21 percent decline to 362 million francs. The adjusted pretax return on equity amounted to 38 percent, compared with 47 percent in the first quarter and a target of more than 15 percent.

Knight Vinke Asset Management LLC, a shareholder based in New York, said in a statement last week it remains “concerned thatUBS’s very valuable wealth management franchise continues to be buffeted by investment banking related losses,” referring to the settlement with FHFA. In an open letter in May, Knight Vinke said UBS should spin off its investment bank.

The investor said it met with UBS shareholders representing more than 30 percent of the share capital and plans to continue consultations through most of the third quarter, as well as seek meetings with members of the bank’s board.

Wealth Management

Credit Suisse Group AG, Switzerland’s second-biggest bank, last week posted a 33 percent jump in second-quarter profit as earnings at the investment bank more than doubled.

JPMorgan Chase & Co., Goldman Sachs Group Inc., Citigroup Inc., Bank of America Corp. and Morgan Stanley reported a cumulative 24 percent gain in revenue at their investment banks from the year-earlier quarter, excluding own debt valuations, data compiled by Bloomberg Industries show.

UBS’s wealth management unit reported a 1 basis point decrease in the gross margin, which reflects how much revenue the bank makes on assets it oversees, to 90 basis points from 91 basis points in the first quarter. Client’s cash balances rose again in the quarter, as market volatility and uncertainty spooked investors, Ermotti said.

“It’s yet another confirmation that until all the issues out there in terms of macroeconomic, geopolitical problems, the euro-zone problem are not resolved, clients’ risk appetite won’t change,” Ermotti said.

The unit attracted 10.1 billion francs in net new money, with emerging markets and the Asia-Pacific regions driving growth, and the most money coming from ultra-high-net-worth individuals. Wealth management Americas added 2.7 billion francs in net new funds and asset management saw an outflow of 2 billion francs.

Super Rich

“I am very pleased with our performance this quarter,” Ermotti, 53, said in the statement. “The results show that our strategy is right and we’re ahead on execution.”

UBS for the first time said how much money it makes on assets of ultra-high-net-worth clients, who typically have more than $50 million to invest. Knight Vinke said that business with smaller clients is more profitable, and those clients don’t need the services of an investment bank.

UBS said the-super rich segment has “compelling economics and growth prospects,” as the lower costs of running the business make up for a lower margin on assets under management.

UBS said its net margin on ultra-high-net-worth assets, which amounted to 394 billion francs at the end of June, was 24 basis points, compared with 40 basis points for other clients. The ratio of pretax profit to revenue was 43 percent for the wealthiest, compared with 33 percent for the others. The bank had 468 billion francs in assets under management for other clients.

U.K. Deal

The bank booked a 104 million-franc charge in wealth management because of the Swiss-U.K. tax agreement, which requires banks to collect taxes on accounts of U.K. citizens. The accord has been in force since the beginning of the year. The Swiss Bankers Association said earlier this month that the country’s banks face losses of about 500 million francs on payments made to the U.K. government as part of the deal related to untaxed assets in Switzerland.

Pretax profit at the wealth management Americas division rose 20 percent to 243 million francs and asset management earnings increased 9.5 percent to 138 million francs, while the retail and corporate unit saw a 5.5 percent decline to 377 million francs.



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