UBS boss Oswald Gruebel signaled his strategy to regain clients' trust may be starting to work as withdrawals slowed and the bank delivered its strongest quarterly profit since the crisis started.

Strong fixed-income trading revenue and higher wealth management margins helped UBS post a first-quarter net profit of 2.2 billion Swiss francs ($2 billion) on Tuesday, above an average Reuters forecast of 2 billion, in a sign that Gruebel's shakeout is bearing some fruit.

He added that net client withdrawals, which dropped to about 18 billion francs in wealth and asset management from 56 billion last quarter and remain UBS's biggest headache, are expected to stay at relatively moderate levels in the near term.

We believe the steps we have taken to deal with the root causes of the net outflows will be effective, he added.

UBS, hit hard in the subprime crisis, outpaced for the second quarter in a row domestic competitor Credit Suisse , which posted net profit of 2 billion francs and disappointed investors for not matching U.S. peers' forecast-beating results.

This is the second positive quarter for UBS since the crisis. This should help further improve client confidence, said analysts at Wegelin.

Analysts had been expecting a bumper quarter after UBS gave a number of upbeat announcements on its investment banking performance and on the trend in client assets.

UBS shares rose 1 percent in early trading to 17.21 francs, outperforming a largely unchanged STOXX Europe 600 banking sector index <.SX7P>.

GRADUAL IMPROVEMENT

Gruebel said UBS was on track to meet its medium-term goals of generating annual pre-tax profit of 15 billion francs and added that he expected a gradual improvement in wealth management and asset management results.

Switzerland's number one bank had to ask for government cash to survive the crisis and was also embroiled in a bitter U.S. tax fraud investigation, prompting rich clients to pull out billions of francs at its key wealth management division.

Persistent pressure by large neighbors like Germany and Italy on Switzerland's already weakened bank secrecy laws is also putting some strain on UBS' massive offshore wealth management business.

We do see a substantial improvement. But these flows are not entirely within our control, Chief Financial Officer John Cryan told a conference call. We are confident that at some stage they will reverse. But whether it's later this year or early next year it's hard to say.

Cryan said UBS was winning client assets in high-growth Asia among the super-rich and in some important European jurisdictions. But its offshore business was still struggling.

The outlook on client flows is more upbeat than what they have been saying before. Previously they had talked about outflows continuing in the medium term, said analyst Dirk Hoffmann-Becking at Sanford C. Bernstein.

But the continued decline in relationship managers does not reassure me, he said.

Hundreds of client advisors have been leaving UBS in the past two years, bringing clients with them. CFO Cryan said he hoped this trend could be reversed toward the end of 2010.

UBS said the investment banking performance was driven by a strong rebound at its fixed income, currency and commodities (FICC). The credit business, which Cryan said was virtually non-existent, was especially strong in the quarter.

The unit's revenues of 2.2 billion francs were more than four times what the division had made in the previous quarter as the bank began to win back market share.

Gruebel, who joined in February 2009 with a brief to turn around UBS, has rebuilt its investment bank arm through a combination of job cuts, new appointments and a sharper focus on the battered fixed-income division.

He said headcount, now at just over 64,000, would remain broadly stable throughout 2010.

UBS's Tier 1 ratio, a measure of a bank's financial strength, stood at 16 pct end of the quarter, one of the sector's highest.

Shares in UBS are up just over 6 percent since the start of the year against a 2.4 percent fall in the STOXX Europe 600 banking index and a 1 percent fall at Credit Suisse.

($1=1.081 Swiss Francs)

(Editing by Mike Nesbit and David Cowell)

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