UBS AG (UBS) Tuesday said its net loss widened in the second quarter, failing to match largely buoyant earnings from rivals, but analysts lauded the Swiss bank's progress of bolstering its capital.

The Zurich-based bank said its net loss for the three months was 1.4 billion Swiss francs ($1.32 billion), compared with a loss of CHF395 million in the year-ago period.

The result was weaker than analyst estimates, which had averaged CHF1.32 billion for the net loss.

Analysts had been expecting UBS to post a much weaker result than healthier rivals such as Credit Suisse Group (CS) and Barclays PLC (BCS), where quarterly profits surged on investment banking gains. Now, UBS, which has written down more than $50 billion in illiquid assets, will be in focus for Friday, when specifics on an settlement between the bank and the U.S. Internal Revenue Service are outlined.

The deal in principle, revealed Friday, is being hammered out by the Swiss and U.S. governments and is expected to include the handover to U.S. authorities of confidential client data of suspected tax cheats.

UBS' financial chief John Cryan didn't comment Tuesday on the settlement, for which legal experts suspect the main terms have already been set.

In its business outlook, UBS said it remains cautious overall, and that a sustainable economic recovery cannot yet be spotted.

Business in the third quarter has continued in much the same fashion as the second quarter ended, Cryan said, which indicates the bank isn't seeing the lull that traditionally hits the summer months. Late in June, UBS warned of an unprofitable quarter but said investment-banking conditions were improving. Then, the bank tapped fresh capital for a fourth time.

However, analysts from Sal. Oppenheim and Helvea lauded UBS' Tier 1 ratio - a measure of capital strength - which rose to 13.2% from 10.5% in the first quarter. UBS has undertaken a series of capital measures since Oswald Gruebel took over as chief executive in February. These include selling Brazilian investment bank Pactual, and a capital injection of CHF3.8 billion at the end of June.

Capital is a major concern for analysts, both because it better shields UBS against any headwinds but also because wealthy clients expect their private banks to be very strongly capitalized.

Credit Suisse, currently the benchmark in terms of capital, posted a Tier 1 ratio of 15.5% for the quarter. UBS' second quarter includes several charges, including CHF1.21 billion on own debt, CHF582 million to restructure, and CHF492 million related to selling Banco Pactual.

UBS' second-quarter operating income surged 45% to CHF5.77 billion from CHF3.98 billion year earlier because UBS reversed hefty year-ago trading losses to generate a small gain.

Its private bank lost CHF16.5 billion in client funds in the quarter, with nervous clients taking flight amid the privacy concerns.

UBS shares have gained 6.3% since the IRS settlement was outlined, highlighting the importance for investors that the bank end the messy lawsuit. At 0708 GMT, UBS was up CHF0.15, or 1%, at CHF16.15, outperforming the Stoxx 600 bank index, which rose 0.4%.

Company Web Site: http://www.ubs.com

-By Katharina Bart, Dow Jones Newswires; +41 43 443 8043; katharina.bart@dowjones.com