By Emma Thomasson
ZURICH (Reuters) - Swiss bank UBS <UBSN.VX><UBS.N> said on Tuesday it would slash costs and admitted it would miss targets set in 2009 after reporting disappointing second quarter profits hurt by sluggish markets and a strong franc.
The bank said it would cut costs by 1.5 billion - 2.0 billion Swiss francs ($1.9 billion - $2.5 billion) in the next two to three years and said it would likely book "significant restructuring charges" later this year.
"We are responding to this changed environment and the weakening economic outlook by adapting our business and increasing efficiency," Chief Executive Oswald Gruebel said in a statement.
"While our target for pre-tax profit set in 2009 is unlikely to be achieved in the original timeframe, our strong competitive positioning and our capital strength give us confidence for the future."
Gruebel, brought out of retirement in 2009 to turn UBS around after it almost collapsed in the financial crisis, had targeted a pre-tax profit of 15 billion francs from 2012, but many analysts had already said UBS was unlikely to meet it.
UBS said it did not expect material improvements in market conditions in the third quarter, particularly given a traditional decline in activity due to the summer holidays, and said these would continue to constrain its results.
It also said it might recognize deferred tax assets that could reduce its full-year effective tax rate although a British levy on bank liabilities introduced just after the end of the second quarter could hit the investment bank's performance before tax by about 100 million francs before the end of 2011.
Net profit fell to 1.0 billion Swiss francs, undershooting analysts' estimates for 1.23 billion francs, hit by lower trading in the investment bank's fixed income, currencies and commodities (FICC) business as well as the strong franc.
Goldman Sachs <GS.N> last week reported a big drop in income from FICC, due to weak client activity and lower risk taking.
RECORD SWISS FRANC HURTS
Switzerland's biggest bank, which had to be rescued by the state in 2008 after massive losses on toxic assets, slashed staff to around 64,000 from around 78,000 before the financial crisis, but it expanded again in the last year to over 65,000.
Personnel costs have risen sharply as UBS has increased fixed salaries to attract and retain staff given its relatively low bonuses, capped after public outrage during the crisis.
Higher fixed salaries have left UBS -- like other investment banks -- with an inflexible cost base that makes it less able to weather the poor trading environment.
UBS and cross-town rival Credit Suisse <CSGN.VX> face the added burden of high cost bases in Switzerland as the safe-haven franc soars to new record highs against the dollar and the euro.
Pre-tax profits at the investment bank slumped to 376 million francs from 1.314 billion francs a year earlier as revenues fell across all businesses.
Client inflows also disappointed, with net new money at its core Wealth Management business slowing to 5.6 billion francs, compared with average analyst forecasts for 7.5 billion francs. Net new money at its asset management business of 1.1 billion also undershot average analyst forecasts for 4.6 billion.
However, inflows were slightly better at its wealth management Americas unit at 2.6 billion francs, compared to average forecasts for 2.1 billion.
(Additional reporting by Martin de Sa'Pinto; Editing by David Cowell)