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 warned by UBS to expect a weak result despite what are turning out to be healthy profits by rivals such as Credit Suisse Group (CS), Barclays PLC (BCS), and - earlier Tuesday - BNP Paribas SA (BNP.FR) - where quarterly profit 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. UBS' second quarter includes several charges, including CHF1.21 billion on own debt, CHF582 million to restructure, and CHF492 million related to selling Brazilian investment bank Pactual.

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.

Analysts from Sal. Oppenheim, JP Morgan and Helvea lauded UBS' strong capital, with its Tier 1 ratio rising 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 Banco Pactual, and a capital injection of CHF3.8 billion at the end of June.

"We believe the second-quarter results may convince investors due to better-than-expected capitalization and lower than expected credit losses," Sal. Oppenheim's Javiero Lodeiro said.

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.

Nevertheless, shares in UBS erased early gains by mid-morning and headed lower, as stocks in Europe generally turned lower. At 1112 GMT, the stock was down CHF0.89, or 5.6%, at CHF15.11, amid a 1.1% drop in the Stoxx 600 bank index.

In terms of losses from rising loan defaults, UBS beat rivals such as Germany's Deutsche Bank AG (DB), which took a beating from investors last week when its provisions against bad lending rose.

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. The main private banking unit, which lost or let go of 299 advisers in the quarter - 7.5% of the total - is likely to see the outflows continue in coming quarters, Gruebel cautioned.

Gruebel also provided a glimpse of what UBS' loss-making investment bank might look like when it emerges from restructuring. Businesses such UBS' flagship equities division must regain market share; and fixed-income, where UBS has always lagged rivals, may take some months to recover, he said. Prime brokerage, which is business for and with hedge funds, will be subtly shifted toward larger, better-known names.

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

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