updated 10/2/2008 7:46:41 AM ET 2008-10-02T11:46:41

UBS AG will make a small quarterly profit after a year of losses, it said on Thursday, lifting its shares as it signaled it had started to turn the corner even as the credit crisis engulfs many rivals.

UBS’s reputation as an icon of Swiss banking stability was damaged after investments in toxic U.S. assets forced it to make $42 billion of writedowns, more than any other bank in Europe, and to slash 7,000 jobs.

UBS said on Thursday it had substantially reduced its U.S. commercial and residential mortgage-related assets, mainly via disposals, and promised the thousands of small and large investors gathered for an extraordinary shareholder meeting that a restructuring plan should help it regain global prominence.

Chairman Peter Kurer told shareholders UBS had fared “reasonably well through this turmoil of the last weeks” as it had responded quickly to the crisis, recapitalizing the bank early and overhauling its business model.

“We want to be an accepted industry leader again. And in Switzerland, our home country, we want to be a respected national champion,” Kurer said. “We will work hard and with humility on these ambitious objectives.”

Kurer announced an ambitious turnaround plan in August after taking over from the highly-criticized former chief Marcel Ospel in April. But the bank’s future was called into question again after the collapse of Lehman Brothers sparked a bout of state intervention in Europe and the United States to prop up the financial sector.

In a statement ahead of the meeting, UBS said it expected to report a “small profit” for the third quarter when it announces results on November 4, but gave no figures on new writedowns or on whether it has stemmed outflows from its wealth management unit.

“The measures they have taken are playing in their favor,” said Andreas Venditti, a bank analyst with Zuercher Kantonalbank. “But the crisis is still there.”

Markets ‘precarious’ into 2009
Kurer said 2009 would be “an overall profitable year” despite what he called “an extremely precarious situation” on the markets that he expected to last into next year. He said the bank would be able to pay a dividend again in 2010.

The UBS stock is still down two-thirds from a year ago. It tumbled to 15.18 francs on September 16 — its lowest level since listing in its current form in 1998 — after Lehman collapsed.

That steep fall triggered speculation the bank may become a takeover target for larger rival HSBC or might even merge with Swiss rival Credit Suisse, prompting Swiss authorities to insist the bank was sound.

When asked about writedowns, Kurer gave no direct answer but said reserves for loans would rise, although not dramatically.

Kurer’s turnaround plan seeks to split troubled investment banking from the wealth and asset management units.

Kurer said returning to positive flows into the wealth management and asset management businesses was one of his top priorities, but he gave no update on the pace of outflows as worried clients have fled to rivals.

Landsbanki analyst Dirk Becker said UBS probably only managed a profit in the third quarter due to the revaluation of its own debt, noting that the bank’s credit default swap spread soared to 280 basis points in the quarter from 130 bps.

“Considering the deep market dislocations, particularly in the weeks since the Lehman collapse, this should still be seen as a solid result,” he said, adding that the news would lessen investor fears that UBS would need another capital injection.

“But the fundamental situation has hardly changed. We expect there will be more money outflows from the private bank and more defections of client advisers, which undermines the bank’s franchise value,” Becker said.

Vontobel analyst Panagiotis Spiliopoulos said the fact UBS expected a small profit meant writedowns for the quarter would probably be in the range of 3.5-3.8 billion Swiss francs.

“UBS is close to reaching an inflection point and we see the risk/reward more balanced,” he said in a note.

Kurer said headcount and operating costs were in the process of being reduced, but made no specific mention of new job cuts.

A source familiar with the situation told Reuters on Wednesday the bank is considering cutting another 1,900 posts in investment banking, equities and fixed income.

The Swiss bank giant tapped investors for nearly $30 billion of additional capital earlier this year. Its Tier 1 ratio, a measure of capital banks put aside against risk, stood at a healthy 11.6 percent at the end of the second quarter.

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