Feb. 7 (Bloomberg) -- Deutsche Bank AG, Germany's biggest bank, posted a smaller than estimated decline in fourth-quarter profit after avoiding the collapse of the U.S. subprime mortgage market that left competitors with record losses.

Net income fell 48 percent to 953 million euros ($1.39 billion), or 1.93 euros a share, on lower revenue from debt trading and higher compensation costs, the Frankfurt-based company said in a statement today. Deutsche Bank rose 0.4 percent in German trading after beating the 923 million-euro median estimate of 12 analysts surveyed by Bloomberg.

Unlike UBS AG and Citigroup Inc., the largest banks in Europe and the U.S., Deutsche Bank reported no net writedowns from debt holdings in the quarter and marked down less than 50 million euros on loans for leveraged buyouts. Zurich-based UBS had $14 billion of subprime-related charges, bringing the total for the world's biggest financial institutions to more than $145 billion. Chief Executive Officer Josef Ackermann, who turns 60 today, said conditions in 2008 will ``remain challenging.''

``Deutsche weathered this storm extremely well,'' said Patrick Lemmens, who helps manage about $3.6 billion at ABN Amro Asset Management in Amsterdam and holds Deutsche Bank shares. ``It's truly impressive that there were practically no writedowns on leveraged loans.''

Retail Bank Gains

Revenue gained 2 percent to 7.29 billion euros, lifted by the private and business clients unit. Earnings from so-called stable businesses were helped by having added more than 640,000 customers through the purchases of Norisbank and Berliner Bank for 1.1 billion euros in 2006. Ackermann said today he may buy Deutsche Postbank AG, Germany's biggest bank by clients.

The company reiterated its pretax profit target of 8.4 billion euros for 2008, excluding one-time costs and charges. The forecast could be endangered by a recession in the U.S., a knock-on slowdown in Europe and financial market swings, Ackermann said. The scenarios are unlikely to happen, he added.

Deutsche Bank rose 27 cents to 75.27 euros in Frankfurt trading today. It has fallen 36 percent in the past nine months, cutting its market value to 39.9 billion euros. That compares with a 33 percent drop in the 60-member Bloomberg Europe Banks and Financial Services Index. The company plans to raise the dividend by 13 percent to 4.50 euros a share.

`Not Easy Year'

The investment-banking unit, run by Michael Cohrs, 51, and Anshu Jain, 45, posted a 57 percent decline in pretax profit to 447 million euros. Revenue at the division fell 1 percent to 3.82 billion euros as fixed-income sales and trading slipped 10 percent to 1.59 billion euros. Expenses rose 13 percent.

By comparison, UBS reported a 12.5 billion-Swiss franc ($11.3 billion) loss, the biggest ever by a bank. New York-based Merrill, the biggest U.S. brokerage, Citigroup, Morgan Stanley and Bear Stearns Cos. also posted record losses.

``Given the material change in the environment since the summer of last year, and the uncertainties which persist in the financial markets, this is challenging for our capital markets- related businesses,'' Ackermann told reporters in Frankfurt. ``We can face the future with confidence, although 2008 will not be an easy year.''

The bank is sticking to its targets of double-digit growth in earnings per share and pretax return on equity of 25 percent, he said. Return on equity was 26 percent in 2007. Even ``when you've got water up to your neck, it's wrong to drop your head,'' he said.

Fixed-Income Reliance

Deutsche Bank may miss the pretax profit goal because a slowdown in debt markets threatens to stifle growth, according to the median estimate of 10 analysts surveyed by Bloomberg. The bank got almost half of 2007 profit from its securities unit.

``My worry is that they're too geared to the fixed-income market,'' said Andy Lynch, who helps manage about $270 billion at Schroder Investment Management in London, before the release. ``So even though they've been good at avoiding writedowns, it's very hard to replace the business they were doing last year.''

Fixed-income trading revenue may rise this year in spite of an industrywide decline, Jain said in an interview today. ``I'd certainly hope that revenues will be flat or up, with a real control on costs,'' he said.

Like U.S. rival Goldman Sachs Group Inc., the world's largest securities firm, Deutsche Bank benefited from early bets against subprime mortgages. The German company probably earned around 400 million euros in the first half from selling derivative contracts which rose in value as the subprime market slumped, Kinner Lakhani, a London-based analyst at ABN Amro Holding NV estimated in July.

`Strict Risk Management'

Deutsche Bank took no further losses in the fourth quarter on collateralized debt obligations after booking gains from hedges and reducing such holdings to less than 1 billion euros from 10 billion euros during the third quarter.

The slowdown of the more than $2 trillion CDO market follows record downgrades last year in mortgage-linked securities, which repackage assets into new securities with varying risks.

``Ackermann handled the subprime problem very aggressively and pressed for strict risk management,'' said Philipp Musil, who helps oversee more than $24 billion at Constantia Privatbank AG in Vienna.

Industrywide losses related to the worst U.S. housing market in a quarter century may exceed $265 billion as regional U.S. banks, credit unions and overseas institutions reduce the value of their holdings, Standard & Poor's said Jan. 31.

High Expenses

Deutsche Bank's total markdowns of 2.3 billion euros in 2007 compare with about $18.4 billion at UBS, $22.1 billion at Citigroup and $24.5 billion at Merrill Lynch & Co., both based in New York.

Net income for all of 2007 increased for a sixth straight year, up 7 percent to a record 6.47 billion euros. The company earned 1.84 billion euros, or 3.56 euros, in the fourth quarter of 2006, boosted by a 355 million-euro tax gain. Pretax profit in the fourth quarter 2007 fell 25 percent to 1.44 billion euros.

``Even with improving market conditions, profit guidance is unrealistic.'' JPMorgan Chase & Co. analyst Kian Abouhossein, who has an ``underweight'' rating on the stock, wrote to clients. In investment banking, ``the main disappointment is due to high expense levels,'' he said.

Pretax profit for consumer banking, asset management and transaction banking rose 4.9 percent to a combined 643 million euros from 613 million euros a year before.

Provisions for risky loans more than doubled to 329 million euros in the quarter as it set aside money for a ``single counterparty transaction.'' The transaction has nothing to do with real-estate, the bank said, without giving further details.

The company booked a 120 million-euro gain from the sale of Linde AG shares and 24 million euros related to a building in New York in the fourth quarter, it said.

To contact the reporter on this story: Elena Logutenkova in Frankfurt at elogutenkova@bloomberg.net; Aaron Kirchfeld in Frankfurt at akirchfeld@bloomberg.net

Last Updated: February 7, 2008 12:42 EST