UBS chairman revives mega-merger vision with wish-list of possible partners: sources

Frankfurt am Main

UBS Group chairman Axel Weber is reviving a decade-long push for a mega-merger to create a European banking behemoth that can compete with US rivals.

Mr Weber has drawn up a wish-list of possible partners for a potential deal including Deutsche Bank, BNP Paribas as well as local competitor Credit Suisse Group, people with knowledge of the matter said, asking not to be identified because the deliberations are private. The German executive sees a deal with Deutsche Bank among the most favoured scenarios, one person said.

Mr Weber has been scenario-planning with executives during the bank's annual strategy discussions in Switzerland during recent days, according to the people.

Beset by interest rates in negative territory, a patchwork of fragmented banking markets and the impact of the coronavirus, European banks are suddenly finding the urge to do deals - at the very least at the domestic level - to bulk up before long-awaited cross-border consolidation in Europe. While domestic mergers are heating up, the lack of a common deposit plan and banking union make deals between banks in different countries less attractive.

UBS may not be close to a deal just yet but it is signalling its intentions to play an active consolidator role as Europe's banks jockey for position to compete against their US peers. The bank regularly conducts thought-exercises on future strategic options and, for Mr Weber at least, time may be running out if his intention is to seal his legacy with a transformative deal before he leaves UBS.

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The chairman has already been at the bank for about eight years and has openly spoken about his own succession planning and tenure limits and of the need for the board to look at peers for inorganic growth.

UBS and Deutsche Bank briefly explored the idea of a merger in 2019 in a deal that would have created continental Europe's biggest financial institution, Bloomberg News reported at the time. The talks, which never proceeded beyond the initial stage, grew out of stalled negotiations to combine the firms' asset management businesses.

Deutsche Bank's leadership will convene this week for its annual strategy meeting where M&A discussions take place regularly and where the bank two years ago - shortly after Christian Sewing had taken over as CEO - opted for UBS as its preferred merger option.

That deal - in theory at least - 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. Mr Weber is also a strong connecting link: 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.

UBS remains the preferred medium-term option for Deutsche Bank, though Mr Sewing wants to see the lender's stock price rise first, one of the people familiar with the matter said. Last year's discussions with UBS ended because of diverging views on each bank's valuation, the person said. The Swiss firm's market value of 42.5 billion francs (S$63.4 billion) is about three times that of its German rival.

UBS and Deutsche Bank spokesmen declined to comment.

Yet the strategy considerations also come at a time of internal change as the bank prepares to usher in a new leadership era. Chief executive officer Sergio Ermotti is being replaced by ex-ING Groep CEO Ralph Hamers in November and wealth management co-head Iqbal Khan is working on a restructuring to boost that business.

Speculation began to swirl last week that UBS might consider some kind of deal with Credit Suisse Group after Swiss finance blog Inside Paradeplatz wrote that Mr Weber and Credit Suisse chairman Urs Rohner could agree on a merger as early as next year.

Mr Weber has been exploring that option with external consultants but hadn't raised the topic to the level of the board of directors until now. The UBS assessment was part of the regular internal planning procedures that happen every year, said the people.

A full-blown merger with its Zurich rival would face major regulatory hurdles as well as additional capital and liquidity requirements, which could outweigh potential cost savings. A combined bank "could become a size issue for Switzerland" and new regulatory requirements "are not favourable of a mega bank merger", JPMorgan Chase analysts Kian Abouhossein and Amit Ranjan said in a note.

BNP, which is seen as a relatively stable European bank and has a similar value to UBS, would be a complementary fit on asset and wealth management as well as investment banking. However, such a combination could stumble over clashing corporate cultures, UBS's ongoing legal problems in France as well as French political resistance. BLOOMBERG