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Deutsche Bank profit rises as investment bank focus pays off

FRANKFURT (Reuters) – Deutsche Bank’s plan to become “the last man standing” in investment banking in Europe is working, the bank said on Tuesday, reporting a 16 percent year-on-year increase in quarterly pretax income.

But the specter of costly litigation and settlements cast a shadow over results, with the bank booking 470 million euros ($631 million) in litigation-related quarterly charges and topping up reserves for future litigation by 22 percent to 2.2 billion euros.

Deutsche Bank faces an array of investigations that ranges from allegations of manipulating the Libor benchmark rate to unfairly favoring some investors in so-called dark pools and has already paid more than 5 billion euros over the past two years in settlements and fines.

In a new development, Deutsche Bank said it had received requests for information from regulators related to high frequency trading, and that it had been named as a defendant in class action complaints alleging violations of U.S. securities laws related to high frequency trading.

With the threat of fines and settlement costs looming, as well as European banking stress tests year, Germany’s largest lender raised 8.5 billion euros in June to strengthen its balance sheet.

Deutsche Bank has come under heavy fire from U.S. authorities in recent weeks, with regulators slamming the bank for shoddy financial reporting, weak technology and inadequate auditing and oversight, which it is addressing in part by hiring 500 U.S. staff.

“There is significant uncertainty as to the timing and size of potential impacts. Accordingly, actual litigation costs for the balance of fiscal year 2014 are unpredictable,” Deutsche Bank said in a presentation.

TRADING MOTOR

Investment banking earnings contributed the lion's share of pretax income of 917 million euros as revenue from Deutsche Bank's important debt trading operations held steady, in sharp contrast with the downturn suffered by its U.S.-based rivals.

Investment banks faced a grim second quarter for revenue, hit by subdued client activity, low interest rates and by shrinking and restructuring of their businesses.

Deutsche Bank posted 1.8 billion euros in net revenue in its debt trading operations, part of its investment bank, while rivals saw a 9 percent decline on average in the quarter.

“For me, the pleasant surprise was debt sales and trading, and the costs line,” said Bankhaus Lampe analyst Neil Smith.

“Sales and trading were better than I expected, at flat year-on-year, compared with the negative 10-15 (percent) we’ve seen with some banks year-on-year.”

Deutsche Bank shares have fallen around 20 percent so far this year versus a 1 percent rise for the STOXX index of European banks. On Tuesday they fell 1.4 percent in early trading compared with a flat performance in the index.

Deutsche Bank’s common equity tier 1 (CET1) ratio rose to 11.5 percent at the end of the quarter following the 8.5 billion euro capital hike in June, which the bank was forced to do as the cost of fines, litigation and restructuring eroded results.

Deutsche Bank had been expected to post pretax profit of 590 million euros, according to the average result of a Reuters poll where the 10 sample estimates spanned a wide range from a 694 million euro loss to a 1.1 billion gain.

(1 US dollar = 0.7445 euro)

(Reporting by Thomas Atkins and Arno Schuetze; Additional reporting by Jonathan Gould; Editing by Maria Sheahan and Mark Potter)

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