UBS flagged a return to client inflows by year-end as strong equities and currency trading gains helped it outdo Deutsche Bank and other rivals, which were hit hard by the European sovereign debt crisis.

UBS's strong second quarter investment banking results stood out against a weak performance at U.S. banking giants Goldman Sachs and Citigroup Inc , driving shares up 10 percent as investors believed Chief Executive Oswald Gruebel's tough restructuring strategy was producing results.

UBS, which was hit by the credit crisis and a tax probe, was also able to slow a bleeding of client money to its lowest level since it started to lose assets in early 2008, and Gruebel said he was confident he could stop outflows by year end.

We have fared well through the euro crisis thanks to our good risk management approach, said Gruebel, a former Credit Suisse CEO who was pulled out of retirement in 2009 to lead UBS.

Our results look reasonably good compared to our peers. I am confident we can stop the client outflows this year

UBS turned in a net profit of 2 billion Swiss francs ($1.90 billion), its third quarterly profit in a row after a string of big losses in 2008 and 2009. It was well above forecasts for 1.34 billion francs.

We have seen a turnaround in investment banking that was not expected so early. These are good numbers in terms of outflows, which have stabilized, said Francois Savary, chief investment officer for private banking unit of Reyl. Gruebel was hired to produce a turnaround at UBS and he is delivering.

Swiss competitor Credit Suisse had also beaten forecasts with a second-quarter profit of 1.6 billion, but tax and accounting gains had partly offset a significant quarterly decline in investment banking.

Deutsche Bank, which fared better than UBS in the credit crisis, turned in a net profit of 1.2 billion euros, only slightly above a poll consensus of 1.04 billion euros, as its fixed-income division suffered more than UBS in the quarter.

Shares in Deutsche Bank, Germany's largest bank and Europe's No.13 by market value, were up 3.8 percent at 1000 GMT, underperforming a 4 percent rise in the European Stoxx 600 banking index <.SX7P>.

Deutsche Bank's Q2 2010 results are disappointing versus consensus as well as UBS, analyst Andrew Lim said, pointing to a 44 percent drop in revenues from its fixed income currencies and commodities division.

IS GRUEBEL'S MAGIC WORKING?

UBS said clients drained a total of about 5 billion francs at the Swiss bank's wealth and asset management units, sharply down from outflows of 18 billion francs in the first quarter.

On a net basis, UBS was able to win 2.6 billion francs of client money at its global asset management, the first time the division saw net inflows since the start of 2008.

But these were offset by outflows of 5.5 billion Swiss franc at UBS' Wealth Management & Swiss Bank division and outflows of 2.6 billion in Wealth Management Americas.

Wealth Management Americas was still unprofitable due to a restructuring charge, but Chief Financial Officer John Cryan said client inflows at the division should materialize soon.

Overall, UBS posted better-than-expected 2Q10 results with better revenue streams especially from investment banking and wealth management as well as a slightly lower cost base and a lower amount of one-off items, said Teresa Nielsen, an analyst at Vontobel. We will revise our estimates upward and put our price target under review, said Nielsen.

UBS was able to slightly improve its investment banking pre-tax profit to 1.3 billion from 1.2 billion in the first quarter as it boosted equities trading by 9 percent and doubled its contribution from forex trading.

In contrast, Credit Suisse halved its investment banking pre-tax gains to just below 800 million francs from the first quarter.

Deutsche's corporate banking and securities division, run by 47-year old Anshu Jain, posted 779 million euros in pretax profit. This together with 1 478 million euros contribution from transaction banking accounted for the lion's share of 1.52 billion euros ($1.96 billion) in group pretax earnings.

Sharply lower loan loss provisions and a low tax rate also helped Deutsche, which stuck to its 2011 target of 10 billion euros from its core businesses but added a note of caution.

While some of the environmental variables are in line with or ahead of our assumptions, others have not yet reached the expected levels, particularly with respect to the normalization of interest rates, the bank said in its quarterly report.

(Writing by Lisa Jucca and Edward Taylor, Additional reporting by Katie Reid and Martin de Sa'Pinto in Zurich; Editing by Louise Heavens)

Germany Investment Citigroup Credit Suisse