Deutsche Bank's third-quarter pretax profit beat forecasts as retail banking and asset management offset a drop in investment banking, which it warned was facing the toughest conditions since 2008 that could lead to more job cuts.
Weaker market activity forced Germany's flagship lender to drop ambitious full-year targets earlier this month and announce 500 job cuts. On Tuesday the bank said it was in the process of cutting 10 percent of its investment banking staff.
"During the third quarter, the operating environment was more difficult than at any time since the end of 2008, driven by a deteriorating macro-economic outlook, and significant financial market turbulence," said Chief Executive Josef Ackermann.
Finance chief Stefan Krause said the bank would continue to adjust headcount if the market environment persisted, adding that the outlook for the sector remained highly dependent on the resolution of Europe's sovereign debt crisis.
The Frankfurt-based bank said its third-quarter pretax profit was 942 million euros ($1.3 billion). A Reuters poll had forecast a figure of 572 million euros, compared with a year-earlier loss of 1.05 billion euros.
By 0954 GMT (5:54 a.m. EDT) Deutsche Bank shares were up 0.8 percent at 28.68 euros, outperforming the Stoxx 600 European banking index <.SX7P>, which was up 0.1 percent.
Pretax profit from the corporate and investment bank fell to 329 million euros from 1.3 billion euros in the year-earlier period as trust services, trade finance and cash management only partially offset a 34 percent slump in debt market sales and trading.
"We view the investment banking result as worse than expected and worse than the recent U.S. peer results," Espirito Santo Investment Bank said in a note.
Overall, group results were flattered by a gain in economically hedged positions and a gain from the widening of credit spreads on its own debt as well as a lower-than expected VAT claim, the analysts said.
Revenues in credit, rates and emerging markets were all down from a year ago, although foreign exchange and commodities both had their best third-quarter revenues ever, and money market revenues were also up on the year.
Equity market sales and trading revenue slumped 41 percent from a year ago, while origination and advisory revenue fell by a third.
The lender said results at the Corporate Banking & Securities (CB&S) division were hit by operating costs relating to an indirect tax position in the third quarter.
The bank said this one-off 310 million euros charge was related to VAT rebates on carbon trading. The bank did not book the rebates from carbon trading pending the outcome of a trial into carbon tax fraud, CFO Krause said.
Third-quarter revenues from fixed income, currencies and commodities (FICC) fell 49 percent on average from the second quarter across JPMorgan, Citi, Bank of America, Goldman Sachs and Morgan Stanley, after stripping out accounting gains.
Deutsche reported a far smaller accounting gain from the value of its own debt than U.S. rivals, with a mark-up of 170 million euros.
UBS reported a gain on its own debt of 1.8 billion Swiss francs during the quarter, helping it report a 1 billion franc profit on Tuesday.
Deutsche Bank had a total 4.8 billion euros' worth of exposure to the sovereign debt of Greece, Italy, Spain, Ireland and Portugal at the end of the third quarter, the bank said. Exposure to Greece alone was 881 million euros.
Banks are under pressure to take mark-down losses on their Greek bonds by at least half under a plan to make the troubled eurozone country's debt more sustainable. Banks in July agreed to take a 21 percent loss on their holdings.
Deutsche marked the valued of its Greek government bonds down by a further 228 million euros, in line with guidance given earlier this month. It has now marked down the value of the bonds by 54 percent.
Deutsche Bank said it had a core tier one capital ratio of 10.1 percent at the end of the third quarter, and CFO Krause said the bank was confident it would not need public sector funds to meet more stringent capital standards being considered by regulators.
It emerged earlier this week that the European Central Bank doubled purchases of sovereign bonds to prevent a disorderly Greek default.
(Additional reporting by Daniela Pegna; Editing by Sophie Walker and Erica Billingham)