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UBS defers key return target on extra capital demands

The logo of Swiss bank UBS is seen at a branch office in the north-eastern Swiss town of St. Gallen July 3, 2013. REUTERS/Arnd Wiegmann
The logo of Swiss bank UBS is seen at a branch office in the north-eastern Swiss town of St. Gallen July 3, 2013. REUTERS/Arnd Wiegmann

ZURICH (Reuters) - Swiss bank UBS said on Tuesday it would defer a key earnings target by at least a year because of temporary demands to hold extra capital, dampening better-than-expected third quarter results that saw the bank swing to profit.

The Zurich-based bank last October said it would cut spending, let go 10,000 staff, and largely withdraw from its fixed income business by 2015 as part of a restructuring drive to return to profitability levels demanded by investors.

The bank hoped the efforts would give it a return on equity of 15 percent by 2015, but on Tuesday said its drive had been thwarted by regulatory demands forcing the bank to hold more capital temporarily.

UBS said it was reviewing how it traded foreign exchange due to a probe into alleged manipulation in the $5.3 trillion-a-day FX market, first disclosed by Switzerland's regulator.

The bank said it had taken and would continue to take "appropriate" action in respect to staff as a result of the ongoing review. It did not elaborate.

The Swiss regulator is imposing a temporary 50 percent top-up of the capital the bank must have against risk-weighted assets, so UBS has enough capital to deal with potential costs of unknown legal probes, compliance issues and other risk matters, UBS said.

"UBS's ambition to achieve a group return on equity of 15 percent by 2015 will be delayed by at least one year," the bank said in a statement. UBS is committed to paying out 50 percent of profits once it has bolstered capital its common equity tier one capital past 13 percent, expected for 2014.

The bank's third-quarter net profit came in at 577 million Swiss francs ($644 million), reversing a loss in the same period last year, when restructuring costs and charges linked to the bank's debt ate away profits. Analyst expectations averaged 537 million francs for the latest results.

In its outlook, UBS said unresolved tensions like the European and U.S. debt issues were worrying its wealthy clients, prompting them to shy away from trading in the fourth quarter.

This hit revenue and margins at UBS's flagship private bank, set to form the cornerstone of the Swiss bank's strategy when the overhaul is complete.

While four of the six largest U.S. banks beat analyst expectations and prior year earnings for the third quarter, that success masked an underlying picture of poor revenue growth, muted analyst expectations and easy comparisons with a bad 2012.

The two which didn't boast improvements were JPMorgan Chase & Co. , which suffered its first loss since the second quarter of 2004 on 7.2 billion euros of litigation charges and Citigroup Inc. , which was hurt by a 26 percent fall off in bond trading revenue.

Last week, UBS's cross-town rival Credit Suisse underwhelmed investors with its plan to shrink interest rate trading after revenue and profit at its investment bank slid in the third quarter.

Also on Tuesday, Deutsche Bank posted a 98 percent drop in quarterly pre-tax profit to 18 million euros ($24.81 million), below the lowest expectations, weighed by a fall in trading income and a 1.2 billion euros increase in litigation provisions.

UBS's revenue edged 0.5 percent lower to 6.261 billion francs in the quarter, mainly due to lower investment banking revenue what are typically slow summer months with dull client trading.

($1 = 0.8955 Swiss francs)

(Reporting By Katharina Bart, editing by Elizabeth Piper)

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