By Joshua Franklin and Angelika Gruber

ZURICH (Reuters) - UBS revealed it had set aside an extra $417 million to cover potential penalties tied to mis-selling mortgage-backed securities ahead of the financial crisis as it delivered an 11 percent rise in third-quarter profit.

Results from UBS on Friday showed the Swiss bank had upped provisions to cover a range of ongoing residential mortgage-backed securities (RMBS) legal to $1.405 billion, from $988 million previously.

This follows news last month that the U.S. Department of Justice had demanded a $14 billion fine from Deutsche Bank in an RMBS investigation.


The DOJ demand was far more than analysts had expected and prompted fears UBS, the world's biggest wealth manager, could also face a stiffer penalty. But Chief Executive Sergio Ermotti said on a call following that each case was different.

"Every bank has its own legal position," he said, declining to make any comment on the timing of any resolution.

UBS also told investors Hong Kong's regulator was investigating its role as sponsor of some initial public offerings. If found guilty, it could face financial penalties and a temporary ban from providing corporate finance advisory services in Hong Kong.

Pre-tax profit for the three months to end-September rose to 877 million Swiss francs ($883 million), beating expectations thanks to strong business in the Swiss market and cost cuts.

"Overall, it was certainly positive," Kepler Cheuvreux analyst Peter Casanova, who has a "hold" rating on the stock with a target price of 14.60 francs, said. "Basically it shows progress on the cost side."

UBS shares gained 2 percent to 14.21 francs by 0814 ET, outpacing the European banking sector index.


Nevertheless, UBS maintained its gloomy outlook amid negative interest rates in Switzerland and economic uncertainty which has kept many investors on the sidelines.

"Our clients really are just not making any moves," Chief Financial Officer Kirt Gardner said.

UBS did not benefit from the same surge in investment banking revenues experienced by U.S. banks since its business is more geared towards equities in Europe and Asia, and Wall Street earnings were boosted by U.S. bond trading.

It is the downside to UBS's widely lauded post-financial crisis strategy to focus on capital-light wealth management while scaling back in investment banking and fixed income, where earnings are more volatile and which consume more capital.

In the tough environment, UBS's wealth management division saw a sixth straight quarter of falling or stagnating gross margins. However, the unit's net margin - which factors in cost savings - rose slightly to 27 basis points.

Transaction-based income in wealth management fell to 334 million francs, the lowest since 2008.

"I don't expect, until we see a change in the environment, that we're going to see a material increase at all in our transaction revenue," Gardner said.

Net new money inflows - a volatile but important indicator of future earnings in private banking - totaled 9.4 billion francs at its wealth management unit and $800 million at its wealth management business in the Americas.


UBS netted 100 million francs in third-quarter savings, bringing total net cost cuts since 2013 to 1.5 billion francs.

However, the bank said increased expenditure from new regulation meant it needed to find additional savings to achieve targeted net cuts of 2.1 billion francs by end-2017.

Ermotti told analysts cost pressures would likely spur industry consolidation and left the door open for acquisitions.

"We are not immune from having to consider (non-organic growth). It would be irresponsible for us not to look at all options."

Group net profit fell to 827 million francs from 2.1 billion francs in the year-ago quarter, which benefited from a net tax benefit of 1.3 billion francs.

UBS saw a positive impact from deferred tax assets (DTAs) of 424 million francs, the bulk of the roughly 500 million the bank had forecast in 2016. DTAs are tax breaks from losses suffered in the financial crisis.

UBS delivered an annualized adjusted return on tangible equity (RoTE) - a key measure of profitability - of 10.1 percent, short of the bank's target for more than 15 percent, although it does not give a time frame for this.

The bank's common equity tier 1 capital ratio, an important measure of balance sheet strength which UBS uses as a benchmark for its dividend, fell to 14.0 percent from 14.2 percent due to a slight rise in risk-weighted assets.

Ermotti played down prospects of raising the ordinary dividend from 0.60 francs per share in 2015, saying the priority this year was to protect the baseline.

($1 = 0.9932 Swiss francs)

(Editing by Michael Shields and Alexander Smith)

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