UBS, which earlier this week reported a rise in profits but a continued heavy outflow of client funds, will face further “headwinds” as it tries to turn around its fortunes, according to analysts at Morgan Stanley.

Morgan Stanley, which has an “equal weight” stock recommendation on UBS’s stock, has a SFr15 price target on the Zurich-listed bank. There is a forecast price-earnings ratio of 10.3 times earnings for this year and 8.3 for 2011, it said in a note issued by Huw van Steenis and Hubert Lam.

They say that Morgan Stanley prefers peer banks with stronger growth potential, such as Credit Suisse, or less demanding valuations.

Clients have continued to exit from UBS’s wealth management division, as results have showed, hit by developments such as an Italian tax amnesty. The bank has also been affected by a high-profile tax evasion case in the US, resulting in UBS paying a $780 million fine to settle criminal charges. It has also handed 4,450 client account details to US authorities as part of an agreement between the Swiss and US governments.

On the plus side, the analysts said, the appointment of Oswald Gruebel as CEO, divestments of some businesses and restructuring initiatives show that UBS is taking determined moves to recover.

“However, the precise run-rate profitability of the franchise remains a question as material outflows in the private bank continue from the fallout of the US tax investigation and the threat of tax amnesties, the investment bank is still in deep restructuring and de-risking is still under way,” the analysts say.