* 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 broad shareholder backing for its strategy and pay policies on Thursday, dealing a blow to a surprise call from activist investor Knight Vinke Asset Management for the Swiss bank to hive off its investment bank.
Knight Vinke's intervention, in an open letter to UBS management, staff and investors, was not taken up by other shareholders during hours of questioning at the bank's annual general meeting (AGM) on the outskirts of Zurich.
UBS said forecast-beating first-quarter earnings earlier this week showed its pared-back investment bank complemented its prized wealth management arm, and contradicted Knight Vinke's view that the two could hold each other back.
"I would not buy the argument that one side is preventing the other side from reaching full potential," one of UBS's largest ten shareholders told Reuters on condition of anonymity.
"For sure, there was a phase where that was the case because of the way the investment bank was run but to me, UBS is learning from past mistakes and is moving forward."
UBS is battling to recover from a taxpayer bailout at the height of the 2007-9 financial crisis and focus on its business with wealthy clients after a series of scandals at its investment bank, including a record $1.5 billion fine for its part in rigging benchmark interest rates and $2.3 billion of losses from a rogue-trading scandal.
New York-based Knight Vinke, which owns just under one percent in UBS, has a track record of agitating for change at companies from banking group HSBC to retailer Carrefour , although its results have been mixed.
Some 89 percent of investors backed UBS's 2012 performance at the AGM, a much stronger endorsement than last year, when anger over the rogue trading scandal meant UBS's board only narrowly avoided defeat with a 52 percent vote in favour.
More than 82 percent of shareholders also backed UBS's pay plans despite anger among retail shareholders at a $26 million signing-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 in the first quarter when a more equities-focused division swung to a pretax profit of 977 million francs. Its private bank, the world's second-largest after Bank of America, also attracted the most customer money for six years in the quarter.
Crosstown rival Credit Suisse illustrated the benefits of maintaining both an investment banking division and a wealth management arm last week when stable revenues at the former helped compensate for a slide in private banking profits in the first quarter.
A previous campaign to radically restructure UBS by a former president, Luqman Arnold, fell apart when Lehman Brothers collapsed in September 2008. Arnold's investment fund's stake in UBS was held by Lehman Brothers meaning he could not access the shares when the U.S. investment bank went bust.
Shares in UBS were down around half a percent to 16.53 Swiss francs in Zurich on Thursday, after hitting a near two-year high of 16.90 francs on Tuesday following its first-quarter results. The European banking index was flat.
Knight Vinke has made a name for itself by targeting corporate titans but its report card is mixed.
Despite a slew of strongly-worded letters and public outbursts, it failed to block the $31 billion takeover of miner Xstrata by commodities trader Glencore late last year.
A two year public campaign against HSBC's diversification strategy failed to stop the bank raising fresh capital to meet its U.S. debts. HSBC closed its U.S. consumer finance business and 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, Knight Vinke's chief executive Eric Knight said UBS's investment banking activities posed risks for its wealth management arm.
"It is argued that the investment bank brings cross-selling opportunities to the wealth management business - and to a limited extent this may be true. However, whatever benefits there may be need to be viewed in the wider context of the risks that the investment bank brings to the group as a whole."
Knight Vinke said the best owners of UBS's investment bank were probably its management and employees.
"This is a discussion that is best had when all the businesses are doing well - as is the case today - and the board needs to be encouraged to act quickly and decisively so as not to lose the opportunity," it said.