* Knight Vinke calls for investment bank to be split off
* UBS says strong Q1 results show current strategy works
* Investors endorse UBS's pay policies and 2012 performance
* One top ten investor dismisses call for outright break-up
By Katharina Bart and Sinead Cruise
ZURICH/LONDON, May 2 (Reuters) - UBS won broadshareholder backing for its strategy and pay policies onThursday, dealing a blow to a surprise call from activistinvestor Knight Vinke Asset Management for the Swiss bank tohive off its investment bank.
Knight Vinke's intervention, in an open letter to UBSmanagement, staff and investors, was not taken up by othershareholders during hours of questioning at the bank's annualgeneral meeting (AGM) on the outskirts of Zurich.
UBS said forecast-beating first-quarter earnings earlierthis week showed its pared-back investment bank complemented its prized wealth management arm, and contradicted Knight Vinke'sview that the two could hold each other back.
"I would not buy the argument that one side is preventingthe other side from reaching full potential," one of UBS'slargest ten shareholders told Reuters on condition of anonymity.
"For sure, there was a phase where that was the case becauseof the way the investment bank was run but to me, UBS islearning from past mistakes and is moving forward."
UBS is battling to recover from a taxpayer bailout at theheight of the 2007-9 financial crisis and focus on its businesswith wealthy clients after a series of scandals at itsinvestment bank, including a record $1.5 billion fine for itspart in rigging benchmark interest rates and $2.3 billion oflosses from a rogue-trading scandal.
New York-based Knight Vinke, which owns just under onepercent in UBS, has a track record of agitating for change atcompanies from banking group HSBC to retailer Carrefour, although its results have been mixed.
Some 89 percent of investors backed UBS's 2012 performanceat the AGM, a much stronger endorsement than last year, whenanger over the rogue trading scandal meant UBS's board onlynarrowly avoided defeat with a 52 percent vote in favour.
More than 82 percent of shareholders also backed UBS's payplans despite anger among retail shareholders at a $26 millionsigning-on fee for the head of the investment bank. Last year,over a third of investors rejected the remuneration report.
SIGNS OF SUCCESS?
UBS's decision to shrink its investment bank bore fruit inthe first quarter when a more equities-focused division swung toa pretax profit of 977 million francs. Its private bank, theworld's second-largest after Bank of America, alsoattracted the most customer money for six years in the quarter.
Crosstown rival Credit Suisse illustrated thebenefits of maintaining both an investment banking division anda wealth management arm last week when stable revenues at theformer helped compensate for a slide in private banking profitsin the first quarter.
A previous campaign to radically restructure UBS by a formerpresident, Luqman Arnold, fell apart when Lehman Brotherscollapsed in September 2008. Arnold's investment fund's stake inUBS was held by Lehman Brothers meaning he could not access theshares when the U.S. investment bank went bust.
Shares in UBS were down around half a percent to 16.53 Swissfrancs in Zurich on Thursday, after hitting a near two-year highof 16.90 francs on Tuesday following its first-quarter results.The European banking index was flat.
RISKS
Knight Vinke has made a name for itself by targetingcorporate titans but its report card is mixed.
Despite a slew of strongly-worded letters and publicoutbursts, it failed to block the $31 billion takeover of minerXstrata by commodities trader Glencore late last year.
A two year public campaign against HSBC's diversificationstrategy failed to stop the bank raising fresh capital to meetits U.S. debts. HSBC closed its U.S. consumer finance businessand focused more on Asia around the time of the campaign,stating that such changes were already in train.
In a letter in Thursday's Financial Times newspaper, KnightVinke's chief executive Eric Knight said UBS's investmentbanking activities posed risks for its wealth management arm.
"It is argued that the investment bank brings cross-sellingopportunities to the wealth management business - and to alimited extent this may be true. However, whatever benefitsthere may be need to be viewed in the wider context of the risksthat the investment bank brings to the group as a whole."
Knight Vinke said the best owners of UBS's investment bankwere probably its management and employees.
"This is a discussion that is best had when all thebusinesses are doing well - as is the case today - and the boardneeds to be encouraged to act quickly and decisively so as notto lose the opportunity," it said.