Switzerland's biggest bank UBS AG is to axe 3,500 jobs to shave 2 billion Swiss francs ($2.5 billion) off annual costs as it joins rival investment banks in reversing the post-crisis hiring binge and preparing for a tough few years.

UBS said almost half the cuts would be in investment banking. It had already said it would cut jobs when it posted weak second quarter profits last month as its underperforming fixed income business weighed.

Like rival Credit Suisse Group AG , UBS has been grappling with rising regulatory costs and a red-hot Swiss franc, which are eating into profits.

The cost cutting is an admission of defeat. UBS overhired after its near-collapse in early 2009, but was unable to win back market share, said Kepler Capital Markets analyst Dirk Becker.

With more difficult markets, the economics of its investment bank became so uncompelling that the group now has to retreat, Becker said.

At 5:52 a.m. EDT UBS shares were up 2.4 percent, outperforming a 1.1 percent rise in the wider European banking sector index.

The measures announced today are designed to improve operating efficiency. UBS will continue to be vigilant in managing its cost base while remaining committed to investing in growth areas, UBS said.

Banks are slimming down as weak investment trading this year looks set to continue, leaving many carrying high costs after hiring aggressively in 2009 and early 2010 when trading income surged following the financial crisis.

Since UBS announced their 2 billion franc cost saving initiative, the economic environment has deteriorated even further, making these plans seem inadequate, Helvea analyst Peter Thorne said.

Hopefully, UBS will be more active in lowering staff compensation levels than they have been so far, Thorne said.

FICC IN A FIX

Fixed income, currencies and commodities (FICC), which accounts for about half of investment bank industry revenue, has been hit particularly hard as bond trading has slumped.

Investors will focus on UBS's investor day in November for more insight into its plans for its fixed income unit, which it has put under review.

Tougher regulation has added pressure to shrink balance sheets and exit some business areas. That has put more scrutiny on costs, which are seen as particularly high at Switzerland's top two banks.

Especially under new regulations, the only way to improve return on equity is to cut costs, said Shailesh Raikundlia, analyst at MF Global in London.

UBS, which had to be rescued by the state in 2008 after massive losses on toxic assets, slashed staff to around 64,000 from 78,000 before the financial crisis, but it grew again in the last year to over 65,700.

Around 45 percent of the cuts will come from UBS's investment bank, 35 percent from wealth management & Swiss bank, 10 percent from global asset management and 10 percent from wealth management Americas.

While total restructuring charges are in-line, we are somewhat surprised about the high part wealth management & Swiss bank have to shoulder: around 165 million francs and 1,225 headcount, Sarasin analyst Rainer Skierka said.

Wealth management is typically a far less capital intensive business than investment banking, with more predictable revenues and more stable margins. Client advisers at the bank's wealth management unit will not be affected by the cuts.

A spokeswoman for UBS declined to give any further breakdown of where the job cuts would come, saying all areas would be affected and that the focus would be on middle and back office staff.

Investment banks worldwide have been hit by slow trading due to the debt problems in the euro zone and United States, as well as regulations aimed at forcing banks to hold more capital to protect them from future shocks after the 2008 global financial crisis.

Credit Suisse has said it would cut around 2,000 jobs after weak trading activity and the strong franc hit its second-quarter results, and thousands of jobs are going at HSBC , Barclays , Goldman Sachs and elsewhere.

Big hikes in fixed salaries since the financial crisis to compensate for tougher bonus rules has left banks with an inflexible cost base that they now need to shrink after a bumpy year so far.

At UBS and Credit Suisse, fixed costs could rise to 65 percent and 82 percent of total compensation, respectively, in their investment banks this year from 55 percent and 66 percent in 2009, according to a recent JPMorgan analysis.

UBS expects to book a restructuring charge of some 550 million francs, and around 450 million francs of this will be booked in the second half of the year, with the majority recognized in the third quarter.

($1 = 0.786 Swiss Francs)

(Additional reporting by Catherine Bosley, Rupert Pretterklieber, Albert Schmieder and Martin De S'Pinto in Zurich and Sarah White in London; Editing by David Cowell and Hans-Juergen Peters)

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