UBS Reports A Sharp Decline In Earnings, Points $350M Finger At Facebook

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UBS (NYSE:UBS) came out with a poor earnings report for the second quarter of the year, recording lower revenues across operating divisions for the period. [1] The largest Swiss bank earned CHF 425 million ($436 million) for its investors in Q2 – almost half the CHF 827 million ($848 million) in Q1 2012. The investment banking unit unexpectedly ended in the red and it attributes that to the ~$350 million in trading losses incurred during Facebook’s (NASDAQ:FB) troubled IPO. The bottom-line was also hit by an increase in operating expenses with swelling litigation and marketing expenses raising the bank’s general & administrative expenses by almost 20% q-o-q.

We maintain our $15 price estimate for UBS as we believe the earnings reflect weak economic conditions which we already considered during our analysis of the bank. We attribute the considerable difference in our price target compared and the current market prices to the widespread pessimism toward European banks in the wake of deteriorating European debt situation. The fact that the bank’s share price fell by 4% over trading after its earnings figures were made public only widened this gap.

See our complete analysis of UBS here

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The Investment Bank Didn’t Quite ‘Like’ This Quarter

Conditions in global capital market this quarter were quite similar to those witnessed during the latter half of 2011, with high volatility making it difficult for the banks to churn revenues through their money-minting trading businesses. Moreover, corporates chose to stay away from the markets, delaying plans to raise additional capital. This in turn hurt the underwriting business of investment banks.

UBS’s equity trading business particularly took a hard fall this quarter, generating revenues of CHF 247 million ($253 million) in Q1 2012. This is around 75% less than the near CHF 1 billion ($1.03 billion) in revenues the equities desk roped in over each of Q1 2012 and Q2 2011. Notably, the figures include a loss of at least $300 million which UBS incurred as a market maker for Facebook during its IPO. UBS is pursuing legal action to recover this loss.

Wealth Management Americas Business Holding Its Ground

UBS’s cornerstone wealth management business – particularly its wealth management and private banking business based out of the Americas – offered some respite to the bank’s overall results. Assets under management for the wealth management business rose by CHF 13.2 billion ($13.5 billion) this quarter.

Although its Swiss wealth management business ended up with lower income compared to the last quarter, there is actually an improvement in operating income if one factors in the effect of one-time accounting credit the bank reported last quarter.

Also, the Wealth Management Americas reporting division ended the quarter with its highest pre-tax income figure of CHF 211 million ($216 million).

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Notes:
  1. UBS’s second quarter 2012 results, UBS Investor News, Jul 31 2012 []