Deutsche Bank's legal woes weigh on second-quarter earnings

FRANKFURT Tue Jul 30, 2013 7:54am BST

The headquarters of Deutsche Bank AG is pictured in Frankfurt May 25, 2013. REUTERS/Ralph Orlowski

The headquarters of Deutsche Bank AG is pictured in Frankfurt May 25, 2013.

Credit: Reuters/Ralph Orlowski

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FRANKFURT (Reuters) - Deutsche Bank AG (DBKGn.DE) pledged to cut risky assets from its balance sheet in response to regulatory concerns, as quarterly profit missed expectations after a 630 million euro (544 million pounds) hike in litigation reserves.

Germany's flagship lender posted an 18 percent fall in second-quarter pretax profit to 792 million euros, well below the 1.3 billion forecast by analysts in a Reuters poll.

Its shares were indicated 2.5 percent lower in premarket trading.

"We expect settlements to accelerate in the coming quarters," Co-Chief Executive Anshu Jain said, referring to the bank's legal problems, but without elaborating on which legal issues were on track for being resolved.

The lender's quarterly earnings stands in sharp contrast to peers. So far this reporting season, investment banking rivals like Morgan Stanley (MS.N) , Goldman Sachs (GS.N), JPMorgan Chase & Co (JPM.N), and Bank of America Corp (BAC.N) have beat analysts' profit expectations, thanks largely to strength in trading and underwriting.

The Germany-based bank identified 250 billion euros worth of assets to cut in an effort to meet new bank safety rules. "We are committed to further reducing (the) balance sheet in a manner that enables us to meet requirements on (the) leverage ratio," Co-Chief Executive Juergen Fitschen said in a statement.

Around 3.3 billion euros worth of assets had already been reduced by changing the risk model on some of the assets in its Postbank unit.

Deutsche said it will seek to achieve a leverage ratio of 3 percent under more stringent bank safety rules after regulators questioned the bank's ability to absorb financial shocks in a possible future crisis.

Although the bank raised capital in April, one of the top U.S. regulators, Thomas Hoenig, Federal Deposit Insurance Corp vice chairman, last month called Deutsche Bank "horribly undercapitalized.

Hoenig said Deutsche Bank looked weak if you measured the bank's leverage ratio - which compares a bank's shareholder equity to its total assets without using risk weightings.

Since June 1, 2012 when Deutsche's new leadership took over, the bank's share price has risen 32 percent, but has lagged key peers and the STOXX Europe 600 banking sector .SX7P, which has jumped 47 percent.

By contrast, Barclays shares have risen 67 percent, JP Morgan 63 percent and UBS 58 percent, Thomson Reuters data show. link.reuters.com/kag99t

(Editing by Tom Atkins and David Holmes)

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