Deutsche Bank, UBS briefly explored idea of merger this year

Deutsche Bank chief Christian Sewing. Photo / Getty Images

Deutsche Bank and UBS Group briefly explored the idea of a megamerger earlier this year that would have created continental Europe's biggest financial institution, people with knowledge of the matter said.

Top Deutsche Bank and UBS officials held preliminary discussions in recent months about a potential combination, according to the people, who asked not to be identified because the information is private. The talks, which never proceeded beyond the initial stage, grew out of now-stalled negotiations to combine the firms' asset management businesses, the people said.

The move underscores the wide range of options Deutsche Bank has been willing to explore as Chief Executive Officer Christian Sewing hunts for a new strategy to present to investors. There may be regulatory support for tie-ups amid increased US competition: European Central Bank President Mario Draghi said in April that Europe's banking system is overcrowded and "the need for consolidation is very significant."

In theory, a deal would marry Deutsche Bank's fixed-income focus with UBS's bigger equities business. It would also bring together UBS's wealth management prowess with Deutsche Bank's access to German entrepreneurs. Deutsche Bank shares have fallen 34 per cent over the past year, giving it a market capitalisation of US$14 billion ($21.4b), while UBS is valued at US$44b.

Still, plenty of hurdles would need to be overcome if they were to seriously pursue a transaction, ranging from headquarters location to job cuts and leadership of the combined firm. The Swiss government may also be reluctant to allow a huge expansion in investment banking after shedding risks since a 2008 taxpayer rescue of UBS.

Merging Deutsche Bank and UBS would create a banking powerhouse with nearly US$2.6 trillion of total assets, approaching the size of US giant JPMorgan Chase. The combined entity would just surpass BNP Paribas, which had 2.28 trillion euros (US$2.54t) of assets at the end of March, as the biggest financial institution in continental Europe, data compiled by Bloomberg show.

Representatives for Deutsche Bank and UBS declined to comment.

Axel Weber, UBS's chairman, said earlier this year that he believes there should be consolidation among European banks -- but that his firm wouldn't participate. Still, he was formerly the president of the German Bundesbank as well as a Deutsche Bank CEO candidate and has close ties to many of the stakeholders involved.

Deutsche Bank's top executives have said they're open to deals in the future after merger talks with hometown rival Commerzbank AG broke down in April. Deutsche Bank shares have continued to decline since then and hit another all-time low on Friday.

The possibility of merging Deutsche Bank with another European institution has come up before, as the German lender seeks a path to recovery after years of failed attempts to turn its business around.

Deutsche Bank ran through several potential merger scenarios at a strategy retreat last September, though it decided the timing wasn't right to proceed, Bloomberg News has reported. Meeting attendees, who included senior management and supervisory board members, identified a tie-up with UBS as a favoured option if the bank were to pursue a cross-border deal, people with knowledge of the matter said.

People close to Deutsche Bank's leadership have also floated names like BNP and ING Groep. All these options have so far been seen as remote. Deutsche Bank's stock decline means it would probably be a junior partner in any deal, and the German government is unlikely to surrender its banking champion.

Sewing said this month he won't shy away from "tough cuts" to the investment bank, without specifying where they would occur. He has been accelerating cost cuts at Deutsche Bank and plans to unveil details about a bigger strategic revamp within the next two moths, people familiar with the matter have said.