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UBS Group $UBS in Merger Talks with Deutsche Bank (DB) as Share Price for Both Continue to Slide

(Bloomberg) -- Deutsche Bank AG and UBS Group AG 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 U.S. 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% over the past year, giving it a market capitalization of $14 billion, while UBS is valued at $44 billion.

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 $2.6 trillion of total assets, approaching the size of U.S. giant JPMorgan Chase & Co. The combined entity would just surpass BNP Paribas SA, which had 2.28 trillion euros ($2.54 trillion) of assets at the end of March, as the biggest financial institution in continental Europe, data compiled by Bloomberg show.

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From: Deutsche Bank, UBS Briefly Explored Idea of Merger This Year (Bloomberg)

The share price of UBS Group $UBS continues to struggle after consolidating in 2019. On the daily chart below we can see that it had already been on a downtrend in 2018. The breakdown thus opens up a bearish continuation scenario.

UBS Daily Chart

(click to enlarge)

Bears in Charge:
- The daily chart above shows a market that has been bearish and is continuing that trend after consolidating in 2019 so far.
- Last week, price broke below the consolidation range support at $11.60. 
- We are very likely going to see UBS test the $10 handle. 
- This name has not been able to recover since the great financial crisis of 2007. 
- While it did bounce from a low around $8.00 to a high around $23, we can see now that the rally did not sustain. 
- I wouldn't be surprised if price breaks below $10 and reach down to the 2009 lows around $7.75. 
- Price action looks dire for DB as well.

Deutsche Bank $DB has also been struggling. Unlike UBS, DB has fallen much lower than the lows from the Great Financial Crisis. I am not confident on the upside of these two names although they might show some short-term recovery swings especially if the financial media hypes up the merger. 

It does look like European bank names have been struggling. Across the pond, the US bank names like JP Morgan $JPM, Morgan Stanley $MS, and Bank of America $BAC have seen better days since the GFC, and would likely be better investments for the next couple of years.

Deutsche Bank DB Daily Chart

(click to enlarge)

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