Oct. 31 (Bloomberg) -- Deutsche Bank AG, Germany's biggest bank, said the fourth quarter began ``very positively'' and reiterated its profit forecasts after tax credits and asset sales increased earnings by 31 percent.

Deutsche Bank rose the most six weeks in Frankfurt trading after the company said third-quarter net income climbed to 1.62 billion euros ($2.34 billion), or 3.31 euros a share. The bank estimated Oct. 3 that profit would exceed 1.4 billion euros.

Gains from German tax changes, the sale of Deutsche Bank's North American headquarters and lower compensation expenses cushioned the impact of 2.16 billion euros in writedowns and trading losses linked to the U.S. subprime mortgage market crash. The results came a day after UBS AG, Europe's biggest bank by assets, reported its first loss in almost five years and Merrill Lynch & Co. ousted Chief Executive Officer Stan O'Neal.

``Compared with what banks have been reporting, this is the best I have seen so far,'' said Thomas Radinger, who helps manage $101 billion at Pioneer Investments in Munich, including Deutsche Bank shares.

The stock rose 3.25 euros, or 3.7 percent, to 92.05 euros, valuing the company at 48.6 billion euros. The shares are down 9 percent this year, compared with a 7.8 percent slump in the 63- member Bloomberg Europe Banks and Financial Services Index.

Profit Goal

Deutsche Bank cut personnel costs at the corporate and investment bank by 87 percent by taking back some funds set aside for bonuses during the first half of the year. ``They have satisfied shareholders at the expense of their employees,'' said Kinner Lakhani, an analyst at ABN Amro Holding NV in London who rates the stock ``hold.''

The current quarter started ``very positively'' after an improvement in some of the businesses that fared worst in the previous three months, such as credit and proprietary trading, Chief Financial Officer Anthony di Iorio told analysts on a conference call today. The rest of the quarter is difficult to predict, he said.

The bank expects to meet 2008 financial targets, ``assuming markets function at normal levels,'' CEO Josef Ackermann said in the statement. The bank aims to increase pretax profit to 8.4 billion euros in 2008, excluding one-time costs and gains.

The investment-banking unit, run by Anshu Jain and Michael Cohrs, recorded a loss of 179 million euros in the quarter, the first in five years, after earning 1.03 billion euros in the year-earlier period. Pretax profit at the consumer banking, asset management and transaction banking units rose 35 percent to a combined 832 million euros.

Sales and Trading

Investment-banking revenue in the fourth quarter may be ``significantly lower'' than the record levels reached over the past year, though it should remain ``high'' when viewed on a longer-term basis, Deutsche Bank said.

Sales and trading revenue, which accounted for almost half the bank's total last year, slumped 62 percent after 1.56 billion euros in writedowns and trading losses in fixed-income and equities. The bank also wrote down loans to fund buyouts by 603 million euros, net of fees, leaving it with leveraged finance commitments totaling 41.4 billion euros at the end of September.

Deutsche Bank's writedowns are the third-highest as a proportion of the securities unit's revenue among the eight biggest investment banks that already reported earnings, behind New York-based Merrill and UBS of Zurich, according to company reports. Zurich-based Credit Suisse Group, the second-largest Swiss bank, publishes results tomorrow.

Not at Deutsche Bank

When asked whether he expects banks to make further writedowns, Ackermann said, ``it could very well be that there are further corrections, but I don't believe they will be at Deutsche Bank.'' The company won't be affected by a worsening of the U.S. subprime market, he said.

Personnel expenses at the corporate and investment bank fell to 177 million euros in the quarter from 1.38 billion euros, reflecting ``lower performance-related compensation in line with business results,'' the bank said.

Debt sales and trading revenue dropped 71 percent to 576 million euros, as ``substantial market turbulence caused breakdowns in relationships between credit securities and hedging instruments,'' the bank said. Equities trading revenue fell 38 percent to 428 million euros.

The bank had about 730 million euros in proprietary trading losses in the quarter, di Iorio said.

``This disappointment undermines Deutsche's claim that it would make money trading in both good times and bad,'' Stuart Graham, an analyst at Merrill with a ``neutral'' rating on the stock, said in a note to clients.

Losses at the investment bank were cushioned by 654 million euros of gains from selling stakes in Allianz SE, Linde Group, and a building on 60 Wall Street in Manhattan. An appreciation in the value of the bank's option to increase its 10 percent stake in China's Huaxia Bank Co. also contributed. The company booked about 600 million euros in tax credits in the quarter.

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

Last Updated: October 31, 2007 12:57 EDT