UBS AG reported its first quarterly profit in more than a year, but its private banking business continued to hemorrhage wealthy clients spooked by assaults on Switzerland's bank secrecy and lingering doubts about the Swiss bank's financial health.

UBS swung to a profit of about $1.13 billion in the fourth quarter, from a loss of about $8.98 billion a year earlier, boosted by a tax credit and aggressive cost cutting. It was UBS's first profitable quarter since Chief Executive Oswald Grubel arrived a year ago aiming to turn around a bank that has been among the hardest hit by the financial crisis.

While the headline profit marks a milestone in UBS's turnaround, the group is struggling to stabilize its huge private bank. Its wealth management and Swiss bank unit had far more outflows than analysts had expected. The exodus stemmed from the loss of many UBS private bankers who have quit and taken their clients elsewhere. Another factor is an aggressive tax amnesty in Italy, which drove many account holders to transfer money back home to other banks. For the year UBS lost $2.57 billion, compared with $20.01 billion for 2008.

UBS will pay about 34% more in cash bonuses for 2009 than for 2008. Amidst a global controversy over bank bonuses, UBS has hiked fixed salaries, pegged bonuses to longer-term performance and paid out more of the bonuses in shares rather than cash. But as banking compensation rises again, UBS has had to offer competitive pay packages as it rebuilds its business. CEO Grubel will take no bonus for 2009.

UBS's private bank has been hit hard by a bruising battle with U.S. authorities, who accused the bank of helping U.S. taxpayers avoid taxes by setting up secret accounts. Last August, the Swiss government settled the case with the U.S. by agreeing to hand over the details of 4,450 UBS accounts. UBS management hoped the settlement would help restore client trust and begin to stem the outflows. However, last month a Swiss court decision blocked Bern from handing over the names, raising fresh doubts about the settlement.

Moreover, German officials are considering paying informants for the names of tax evaders with accounts in Switzerland, sparking a renewed assault on Swiss banking secrecy. UBS reiterated Tuesday it does not know if UBS client data is among the records, adding it has no evidence currently that they are. The U.S. and German cases have hampered efforts by UBS management to convince current clients not to leave the bank and to persuade new ones to opening accounts.

UBS said that "in the immediate future, [it] still expects to report outflows," though management is hopeful the fourth-quarter profit will help its bankers deflect a major worry raised by many UBS clients.

"We were desperately keen to report a profit so that clients would regain their confidence," said Chief Financial Officer John Cryan in an interview. "The principal factor in turning around the outflows is having one or two — and many more — quarters of profitability."

The Italian government extended the amnesty, under which it lowered the penalty for undeclared money when people came clean, until April. But Cryan said the Italian tax amnesty is not likely to have as large an impact for the current quarter as it did for the last one. By persuading clients to transfer the assets to UBS's Italian operations, it kept about 63% of funds declared by UBS Italian clients.

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