UBS Results Hurt by Facebook

UBS (NYSE: UBS) posted earnings that were hit by, among other things, a loss due to the Facebook (NASDAQ: FB) IPO. It was the first loss of substantial size released by any large financial firm.

The bank reported a 27% drop in a second-quarter pre-tax profit CHF 951 million.Total operating profit was CHF 6,408 million, which was down 2%.

In the report, UBS wrote:

UBS again delivered on its key strategic objective of lowering Basel III risk-weighted assets1 (RWA), with reductions of CHF 45 billion in the second quarter. The firm has already surpassed its RWA reduction targets for 2012 in the Investment Bank and the Group as a whole, and is accelerating towards its 2013 targets. On a fully applied basis, the firm’s Basel III tier 1 ratio increased to 8.8% from 7.5%. UBS has reduced its 2016 Group target for Basel III RWA by CHF 30 billion to less than CHF 240 billion. The Investment Bank RWA target for 2016 has been lowered by CHF 15 billion to less than CHF 135 billion, as UBS believes the business can operate successfully within its target performance ranges with lower RWA. UBS is confident it can achieve its targeted RWA and capital ratios without diluting shareholder equity.

Results for the investment bank, were a CHF 130 million loss. Net profit dropped in the Global Asset Management, and Investment and Corporate operations.

Speaking of Facebook:

Due to the gross mishandling of Facebook’s market debut by NASDAQ we recorded a loss of CHF 349 million in our US Equities business as a result of our efforts to provide best execution for our clients. As a market maker in one of the largest IPOs in US history, we received significant orders from clients, including clients of our wealth management businesses. Due to multiple operational failures by NASDAQ, UBS’s pre-market orders were not confirmed for several hours after the stock had commenced trading. As a result of system protocols that we had designed to ensure our clients’ orders were filled consistent with regulatory guidelines and our own standards, orders were entered multiple times before the necessary confirmations from NASDAQ were received and our systems were able to process them. NASDAQ ultimately filled all of these orders, exposing UBS to far more shares than our clients had ordered. UBS’s loss resulted from NASDAQ’s multiple failures to carry out its obligations, including both opening the Facebook stock for trading and not halting trading in the stock during the day. We will take appropriate legal action against NASDAQ to address its gross mishandling of the offering and its substantial failures to perform its duties. Although as in all such matters there can be no assurance as to the amount of any recovery we may obtain, we intend to pursue compensation for the full extent of our losses.

In other words, wait for the lawsuits.

Douglas A. McIntyre