Facebook IPO fouls up UBS: Bank's profits dive 58%

Facebook shares have plunged nearly 40% since the company's May 18 initial public offering, but the investors who have endured those losses may take some solace in knowing that big banks are also feeling the pain.

Swiss bank UBS said higher market volatility and more caution on the part of clients hammered its second-quarter results, sending profits plunging 58% from a year earlier, and the social network's debut was a big part of the disappointment.

The firm's investment banking unit was one of the prime culprits for the steep decline, booking a loss of 130 million Swiss francs ($133 million) after earning 170 million francs a year earlier. While challenging market conditions dinged revenue in the bank's securities business, the firm highlighted the botched Facebook IPO as a major hit to results.

UBS says the "gross mishandling" of the offering by Nasdaq resulted in a loss of 349 million Swiss francs ($357 million) for its U.S. equities business. Clients, who did not receive confirmation from Nasdaq for pre-market orders, repeatedly entered buy orders, which resulted in UBS being oversupplied with Facebook shares.

The resulting losses were due to "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," the bank said, warning that it plans to take legal action against the exchange operator aimed at fully recouping its losses.

Nasdaq is hardly the only participant in the Facebook IPO facing criticism. Lead underwriter Morgan Stanley, and Facebook executives including CEO Mark Zuckerberg and CFO David Ebersman have been maligned for everything from the method of pricing the IPO to how certain financial projections were shared with prospective shareholders.

Overall, UBS profits plunged from just over 1 billion Swiss francs ($1 billion) to 425 million ($434 million) in the second-quarter, falling well short of estimates. The bank's shares dropped 5.6% at the opening bell Friday.

UBS CEO Sergio Ermotti touted the firm's improving "capital, liquidity and funding positions," but the bank warned that ongoing global issues, from Europe's sovereign debt and financial woes to the U.S. fiscal cliff, "will continue to exert a strong influence on client confidence and, thus, activity levels in the third quarter."

If progress is not made on those fronts, along with the typical summer slowdown in capital markets businesses, "would make further improvements in prevailing market conditions unlikely," UBS says, and "generate headwinds for revenue growth, net interest margins and net new money." The latter point is critical, since wealth management was a modest bright spot in Q2, posting a pre-tax profit of 502 million Swiss francs ($513 million), a record 211 million ($216 million) of which came from the Americas segment.

(Published by Forbes - July 31, 2012)