Swiss bank UBS posted another big loss in the second quarter as wealthy clients were scared off by a U.S. tax row, but said it hoped to start winning back trust now that a U.S. deal was in sight.

UBS said on Tuesday it remained cautious about its prospects, given the economic environment, but after taking out one-off restructuring and other charges of 2.3 billion Swiss francs ($2.17 billion), it made an operating profit of 971 million francs, its best in eight quarters.

The bank posted a net loss of 1.4 billion francs, compared with an average forecast from analysts in a Reuters poll for a loss of 1.1 billion francs, and suffered 39.4 billion francs of outflows at its wealth and asset management divisions.

Chief Executive Oswald Gruebel told analysts a deal UBS struck with the U.S. government on Friday to settle their tax dispute should help reverse outflows as the bank rebuilds its reputation, although recovery would take more than a quarter.

We certainly think we will reverse the trend in outflows, Gruebel said.

UBS is expected to finalize the deal this week. It is not expected to have to pay a fine for helping U.S. clients dodge taxes but could hand over 5,000 names of secret account holders, compared with the 52,000 Washington is seeking.

Gruebel declined to comment on the details of the deal but Chief Financial Officer John Cryan said the bank had made no additional provision for settling the U.S. litigation.

Shares in UBS, which have missed out on much of the recent rally in bank stocks but gained 7 percent after the tax deal, were down 4.8 percent at 15.25 francs at 0949 GMT, compared to a 0.8 percent weaker DJ Stoxx European banking sector <.SX7P>.

UBS posts mixed results... In our view, the market is pricing in UBS turning back to profitability levels similar to peers too quickly, said Kepler Capital Markets analyst Mathias Bueeler.

The investment bank is simply not taking advantage of improved market conditions to the same extent as peers. Especially in fixed income, a market that is thriving currently, UBS remains behind peers.

Gruebel said it would take six to 12 months to rebuild the UBS fixed income business.

The UBS loss came in contrast with forecast-beating results at some European rivals such as Switzerland's Credit Suisse and HSBC and Barclays , which took advantage of a market rebound while UBS was busy cutting costs, paring its balance sheet and fighting the U.S. case.

SWISS OUTFLOWS SLOW

The U.S. case has compounded UBS's woes in the credit crisis, prompting many of its wealthy clients to withdraw their assets, a trend that accelerated in the second quarter with outflows increasing from its wealth management operations in the Americas and its asset management business.

However, outflows slowed at the wealth management and Swiss bank business, to 16.5 billion francs from 23.4 billion in the first quarter, with outflows from Swiss clients almost stopping at 0.2 billion, compared with 16.3 billion from global clients.

Gruebel said the U.S. tax litigation would push up compliance costs for the wealth management industry as a whole and did not rule out similar action by European governments.

Other governments will closely watch what is going on there, he said when asked about the U.S. case.

Gruebel said he expected the first signs of net new money growth in the onshore Swiss business but did not expect to see a quick reversal of outflows in international offshore assets.

UBS had already warned in June that it would post a loss, and said it saw client withdrawal in all its wealth management and asset management divisions.

The bank had to accept a 6 billion franc state cash injection last year after making $54 billion writedowns on toxic assets. When the bank raised $3.5 billion of new capital in June, the government said it had agreed not to sell its stake before August 4 as part of the deal.

UBS continued to further reduce risks in the second quarter and was able to boost its Tier 1 ratio to a solid 13.2 percent, but still well below the 15.5 percent reported by Credit Suisse.

Cryan said now the quarterly report was out of the way, the Swiss government could look to change its mandatory convertible notes into shares and place them in the market.

The Swiss finance ministry declined to comment on its stake, but said the bank was still in a process of stabilization.

(Additional reporting by Sven Egenter, editing by Will Waterman and Mike Nesbit)

($1=1.061 Swiss Franc)

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