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Red Face

31 July 2012 By Peter Thal Larsen

UBS is making a habit of springing nasty second-half surprises. Eleven months ago, the Swiss bank shocked investors with a 2 billion Swiss franc rogue trading loss. Now it has fessed up to dropping 350 million francs on Facebook’s bungled initial public offering. In an already tough second quarter, it’s the last thing UBS’s slimmed-down investment bank needed.

For months, rivals have wondered how UBS could have stubbed its toe on Facebook despite not being selected as a bookrunner on the much-hyped offering. According to the bank, its equities arm received many orders for Facebook stock from fund managers and wealthy clients. Due to trading glitches at the Nasdaq exchange, it repeated orders multiple times, only to be left with large amounts of unwanted stock. Assuming UBS paid an average price of $40 per share and subsequently sold at an average of $31, that implies the bank ended up with almost 40 million Facebook shares – or roughly 10 percent of the company’s freely traded stock.

UBS says it will take legal action against Nasdaq for what it describes as the exchange’s “gross mishandling” of the IPO. Nevertheless, the debacle overshadowed a second quarter already marred by weak trading volumes and reduced corporate finance activity: as a result, UBS’s investment bank slipped back into the red.

In other areas, however, UBS actually performed rather well. Assuming the full implementation of Basel III rules, the bank’s core Tier 1 capital ratio improved by more than a percentage point to 8.8 percent, aided by ongoing deleveraging. There are also signs that UBS is recovering its status as a safe haven for the world’s wealthy: its private banking arm attracted 9.5 billion francs of net new money in the quarter. The flipside is that risk-averse clients tend to hoard cash. As a result, the private bank’s gross margin slipped by 4 basis points to 89 basis points.

UBS continues to shrink its investment bank: the unit’s target for risk-weighted assets by 2016 has been shaved to 135 billion francs, from 170 billion francs today. But as long as UBS remains capable of producing unwelcome shocks, investors will remain wary.


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