UBS increases banker bonuses after profit turnaround

* Q4 net profit boosted by 470 million franc tax benefit

* Slimmed-down investment bank avoids bond trading pitfalls

* Warns about impact of emerging market rout

* Expects more litigation and regulatory risks in 2014

* UBS (Xetra: UB0BL6 - news) others named in civil suits related to FX probe

By Katharina Bart

ZURICH, Feb 4 (Reuters) - UBS raised its dividend and increased bonuses for bankers by nearly a third on Tuesday after the Swiss bank returned to a fourth quarter profit, reaping the benefits of a revamp of its investment banking business.

The turnaround follows a transformational year in which UBS successfully hived off loans, abandoned risky bond trading activities and centred the group around its traditional private banking roots. Its shares rose six percent.

The results represent a vindication of sorts for UBS's decision to shrink its investment bank and largely withdraw from riskier activities such as bond trading, where a slowdown has stung rivals such as Goldman Sachs (NYSE: GS-PB - news) , Citigroup (NYSE: C - news) and Deutsche Bank (Xetra: DBK.DE - news) .

UBS, Switzerland's biggest bank, reported fourth quarter net profit of 917 million Swiss francs ($1.02 billion) after it booked a 470 million franc gain from deferring taxes.

The result was nearly three times the 354 million francs average estimate of 16 analysts polled by Reuters and a turnaround from last year's 1.89 billion francs loss when it was fined for trying to rig global interest rates.

UBS increased its bonus pool by 28 percent to 3.2 billion francs from 2012, when awards were cut after it had to pay out $1.5 billion to settle the interest rate allegations.

Chief Executive Sergio Ermotti said compensation at the bank was now "normalised." But the increases drew criticism in Switzerland, where taxpayers are still sore at having to bail UBS out during the financial crisis.

The bank kept a conservative outlook, in particular for its private bank, and said an emerging market rout may unnerve its wealthy clients, which could in turn hit fund inflows, revenue and interest margins.

Analysts said the muted private bank outlook would likely cap future gains in UBS's stock, which is up around 45 percent over the past year, compared to a 12 percent gain in the European banking sector.

"Hats off to them for both the speed and scale of the restructuring but it feels as if much of that good news is captured in current valuations," Alex Potter, analyst at Geneva-based private bank Mirabaud, said. "There is not an awful lot of revenue growth evident in the business."

UBS's investment bank made a 297 million franc pre-tax profit in the quarter, up 18 percent from the quarter before, as strong stock markets bolstered equity trading and advisory fees.

The private bank's profits rose 18 percent, but spending crept higher, in part due to bigger bonuses. It attracted 5.8 billion francs in new client funds, much of this from Asia.

Unlike smaller rival Julius Baer (Other OTC: JBARF - news) , whose profit margins fell in the fourth quarter, UBS held its margin at 85 basis points but said growing this to a targeted range of 95 to 105 basis points would require a sustainable recovery in markets, interest rates and client confidence.

DIVIDEND

In a boost for UBS's capital position, Switzerland's regulator agreed to cut the extra reserves the bank needs for litigation, compliance and other operational risks to 22.5 billion francs from 28 billion francs three months ago.

This brought UBS's common equity Tier 1 ratio - a gauge of financial strength - to 12.8 percent just shy of the 13 percent level at which it has pledged to pay out more than 50 percent of profits.

The bank said the 2013 earnings would allow it to pay shareholders 0.25 Swiss francs a share for the year, two-thirds more than in 2012. The 2013 dividend represents a 30 percent payout ratio.

UBS said it expected elevated charges for litigation, regulatory and similar matters in 2014. UBS has a 1.7 billion franc war-chest to deal with legal tangles.

It is one of a number of banks cooperating with a global investigation in to possible manipulation in the $5.3 trillion-a-day foreign exchange market. It said several class action lawsuits relating to the probe had been filed against it and other banks.

Regulatory authorities are looking at whether traders at some of the world's biggest banks colluded to manipulate benchmark foreign-exchange rates used to set the value of trillions of dollars of investments.