UBS Profits Plunge-Hit by Facebook IPO Loss

UBS, (UBSB),

, Switzerland's largest bank by assets announced a 58 percent drop in net profit to 425 million francs. Losses stemming from the Facebook

initial public offering were 349 million Swiss francs ($356 million). UBS indicated in a statement. "We will take appropriate legal action against NASDAQ to address its gross mishandling of the offering and its substantial failures to perform its duties." UBS acknowledged that a large portion of the losses came from their wealth management business. As market maker's the investment bank felt obligated to participate in one of the largest U.S. IPOs in history. The bank's equity unit was hurt by “gross mishandling” of Facebook's IPO. UBS said they had entered orders multiple times because NASDAQ had not confirmed any fill orders hours earlier. In Zurich early trading UBS shares were down as much as 5.9 percent before recovering slightly losing 4.9 percent on the session, The Swiss lender reported second quarter earnings were below the expectations of analysts. The bank suffered a pretax loss of 130 million francs. Frankfurt based analyst Dick Becker for Kepler Capital Markets indicated, “The investment bank has been underperforming for a while.” After the Facebook debacle, UBS said it will trim its risk weighted assets further than previously planned. However, the strategy of lowering assets also lowers the opportunity for future earnings. Chief Financial Officer for UBS, Tom Naratil, on a conference call stated the market environment remains “challenging” and the bank intends to continue to remain “vigilant” on costs. The bank had cut 3500 jobs last year to lower expenditures and will continue to improve efficiency. UBS is still repairing its reputation from last year's $2.3 billion loss from unauthorized trading, which resulted in their CEO Oswald Gruebel's departure. They have also been named among banks involved in the LIBOR rigging investigation. Not alone in disappointing investors, Deutsche Bank (AG (DKB) earnings dropped 63 percent in the second quarter. UBS and cross-town rival Credit Suisse AG (CSGN) are trying to navigate through the euro zone's weak economic outlook and the debt crisis. UBS looking ahead to the third quarter feels the revenue growth, net interest margins and new money will be under pressure. Until the euro zone sovereign debt and banking issues abate and the looming U.S. “fiscal cliff” hangs in the balance, it will be extremely challenging for UBS and other major European banks to improve revenues. After UBS's substantial loss in the Facebook IPO, paring back risk may be the prudent thing to do. However, for investors that means smaller returns.