Oct. 30 (Bloomberg) -- Deutsche Bank AG, Germany's biggest bank, reported a surprise third-quarter profit after new accounting rules allowed it to book fewer asset writedowns.

The bank rose as much as 9.1 percent in Frankfurt trading after posting net income of 435 million euros ($573 million). Analysts had predicted a loss. Rules easing requirements for marking down investments reduced writedowns for the quarter by 845 million euros to 1.2 billion euros.

Chief Executive Officer Josef Ackermann, who has so far resisted pressure to raise capital or take government help, said financial markets remain ``challenging'' and indicated the bank may trim its dividend. Banks from UBS AG in Zurich to New York- based Citigroup Inc. had to accept state aid after the bankruptcy of Lehman Brothers Holdings Inc. froze credit markets.

``Earnings were better than feared and the use of new accounting rules helped,'' said Thomas Koerfgen, who helps manage about $20 billion including Deutsche Bank shares at SEB Asset Management in Frankfurt. ``The collapse of Lehman has changed the world for investment banks and Deutsche Bank can't escape this.''

Deutsche Bank advanced 2.06 euros, or 8.3 percent, to 26.86 euros by 9:52 a.m. in Frankfurt. The stock has fallen 70 percent this year, slashing the firm's market value to 15.4 billion euros. The decline compares with the 57 percent slump in the 69- company Bloomberg Europe Banks and Financial Services Index.

Investment Banking Loss

The investment-banking unit, led by Anshu Jain and Michael Cohrs, reported a third straight quarterly pretax loss of 789 million euros. The German bank booked writedowns of 1.2 billion euros on loans for leveraged buyouts, residential-mortgage backed securities, assets secured by bond insurers and commercial real estate. That brings total markdowns to about 8.5 billion euros since last year.

Banks worldwide have reported about $687 billion of credit losses and asset markdowns since the start of 2007, data compiled by Bloomberg show.

``After a period of exceptional market turbulence, the outlook for our business remains challenging,'' Ackermann said in a statement. ``We will balance our dividend policy with our commitment to conserving capital strength in a highly uncertain environment.''

Chief Financial Officer Stefan Krause told reporters on a conference call that setting aside money for a dividend at last year's level of 4.50 euros a share ``doesn't make sense'' under current circumstances.

UBS, Citigroup

Pretax profit from the consumer banking, asset management and global transaction banking fell to 449 million euros from 832 million euros a year earlier. Ackermann, 60, is making consumer- banking acquisitions to cut dependence on the securities unit, which accounted for about half of earnings and revenue in 2007.

Deutsche Bank agreed in September to buy almost 30 percent of Deutsche Postbank AG, Germany's biggest consumer bank by clients, for 2.79 billion euros, and has an option to raise the stake. Bonn-based Postbank reported its first loss in more than a decade this week and announced plans to sell new shares, which may cost Deutsche Bank an extra 300 million euros when the deal is completed in the first quarter.

Governments and central banks from the U.K. to Switzerland to the U.S. are coming to the aid of lenders as the financial crisis retards economic growth. Germany forged a 500 billion-euro rescue package, including as much as 80 billion euros to buy stakes in lenders.

Ackermann aims to shrink the company's assets and reduce dependence on borrowed money to avoid raising funds from investors or the government. UBS, the largest Swiss bank, got a $59.2 billion aid package from the Swiss government and central bank on Oct. 16. Citigroup was among nine of the largest U.S. banks to receive a capital injection from the U.S. Treasury.

Cutting Leverage

Deutsche Bank set a goal of cutting the bank's so-called leverage ratio -- total assets divided by shareholders' equity using U.S. accounting principles for derivatives -- to 30 times from 40 times over an unspecified period. It cut the ratio to 34 times by the end of September. The reduction brings Deutsche Bank closer to competitors such as Credit Suisse Group AG and Goldman Sachs Group Inc.

Deutsche Bank said it currently has no need for further capital after reporting a tier 1 ratio, used to assess a bank's ability to absorb loan losses, of 10.3 percent at the end of the third quarter, up from 9.3 percent at the end of June.

``The strengthening of the capital ratios remains in the market focus,'' Andreas Weese, a Munich-based analyst at UniCredit SpA who has a ``buy'' rating on Deutsche Bank, wrote in a note to clients today. ``With a Tier 1 ratio of above 10 percent, we continue to see no need for capital measures.''

Reclassifying Investments

CFO Krause, 45, is overseeing efforts to reduce Deutsche Bank's balance sheet. The company had almost $2.5 trillion of assets at the end of June, the most in Europe after Royal Bank of Scotland Group Plc in Edinburgh. Total assets rose 3.5 percent to 2.06 trillion euros in the third quarter.

International accounting rule makers on Oct. 13 decided that financial institutions in the more than 100 countries that use International Financial Reporting Standards will be able to reclassify some investments so they no longer have to book paper gains and losses as credit markets fluctuate.

The accounting changes, which were backed by the European Union, bring the rules more into line with those in the U.S.

Deutsche Bank's earnings were also boosted by a 321 million- euro tax gain and 273 million euros from the sale of its stake in Allianz SE, Europe's biggest insurer, and shares in industrial- gas maker Linde Group.

Pretax profit was 93 million euros in the period, down from 1.4 billion euros a year earlier. Deutsche Bank's non-interest expenses rose 14 percent to 4.04 billion euros because of a reduction in planned bonuses in the year-earlier period.

Worsening Conditions

Revenue from fixed-income sales and trading gained 60 percent to 924 million euros, helped by foreign-exchange and commodities trading and the accounting rules. The bank had a trading loss of 873 million euros from proprietary credit trading. Equities sales and trading had a loss of 142 million euros, hurt by 386 million euros in losses from trading with the bank's own money and lower demand for equity derivatives.

The investment banking unit, known as corporate banking and securities, faced a ``sharp deterioration'' in market conditions, especially after the bankruptcy of Lehman Brothers, Deutsche Bank said. These market conditions have carried into the fourth quarter, the company added.

Deutsche Bank's consumer banking unit reported a 14 percent decline in pretax profit to 262 million euros as it set aside more money to cover loan-default risks in Spain and Poland. The bank added 237,000 new retail clients in the period, helped by growth in Germany, India and Italy.

Job Cuts

Asset and wealth management had a third-quarter pretax loss of 95 million euros because ``unfavorable'' market conditions hurt fee income. The asset management unit saw 11 billion euros in asset outflows, mostly from money-market funds.

Deutsche Bank increased the number of employees in the quarter to 81,308 from 77,920 a year ago, while trimming the headcount at the corporate and investment bank by 1,668 workers. The world's biggest banks and securities firms have announced about 150,000 job cuts since last year, according to data compiled by Bloomberg.

Credit Suisse announced on Oct. 28 plans to eliminate 500 jobs in its securities unit and some support functions, adding to 1,565 cuts announced over the past year. UBS said earlier this month it will cut 2,000 more jobs at the investment bank, following 7,000 staff reductions already announced in the past year.

To contact the reporter on this story: Aaron Kirchfeld in Frankfurt at akirchfeld@bloomberg.net; Jann Bettinga in Frankfurt at jbettinga@bloomberg.net

Last Updated: October 30, 2008 04:57 EDT