July 28 (Bloomberg) -- Deutsche Bank AG set aside 1 billion euros ($1.4 billion) for risky loans in the second quarter, more than analysts estimated, sending the stock to the biggest decline in four months in Frankfurt trading.

The seven-fold increase in provisions for bad loans at Germany’s largest bank overshadowed a 68 percent increase in net income to 1.09 billion euros, led by higher revenue from trading bonds and stocks. The Frankfurt-based company predicted a further increase in private and corporate insolvencies.

“Deutsche Bank had to significantly increase loan-loss provisions because of the worsening economy, and it won’t get better anytime soon,” said Lutz Roehmeyer, who helps manage about $15.5 billion at Landesbank Berlin Investment in Berlin, including Deutsche Bank shares.

Chief Executive Officer Josef Ackermann said in a letter to shareholders he remains “cautious” on the economic outlook and predicted “continued pressure on the credit environment.” Loan provisions rose from 135 million euros a year earlier, and exceeded the 634 million-euro estimate of analysts surveyed.

Deutsche Bank posted the biggest slump since March 30 in Frankfurt trading, declining 5.94 euros, or 11 percent, to 46.09 euros. The bank has gained 66 percent this year, the eighth- biggest increase on the Bloomberg index of 63 European financial companies.

Debt and Equity

The investment bank, run by Anshu Jain and Michael Cohrs, posted pretax profit of 828 million euros after a loss a year earlier as sales and trading revenue more than doubled to 3.48 billion euros. Analysts estimated earnings of 1.08 billion euros at the securities unit.

Deutsche Bank’s global markets business, run by Jain, had debt trading income of 2.6 billion euros on credit, interest- rate and currency sales, below analysts’ estimates. That compares to 602 million euros a year earlier, which included 2.1 billion euros in markdowns.

Equity trading generated 903 million euros in revenue, the most in six quarters and more than analysts predicted, helped by equity derivatives and North American business.

The asset and wealth management business reported a pretax loss of 85 million euros, a bigger deficit than analysts estimated, compared with a year-earlier profit. Earnings at the consumer bank fell 83 percent to 55 million euros.

Progress in Economy

“The investment bank generated a lot of revenue thanks to the boom in corporate bond sales, but retail banking, asset and wealth management and transaction banking really lost out,” Roehmeyer said.

The bank posted a second straight quarterly profit after reporting its first annual loss in more than 50 years in 2008 amid the worst financial crisis since the Great Depression. In the second quarter, sales of corporate debt in Europe rose 12 percent from a year earlier to 329 billion euros, data compiled by Bloomberg show.

“The outlook for the remainder of 2009 is strongly influenced by progress in the global economy,” Ackermann, 61, said in the statement. “In an uncertain environment, Deutsche Bank is well prepared.”

The bank incurred 1.4 billion euros in charges, including provisions for credit losses, legal costs related to the failed buyout of Huntsman Corp. and severance payments.

Total loan-loss provisions at the bank almost matched the amount set aside for possible defaults in all of 2008. Those provisions included 508 million euros for assets moved into the banking book under accounting rules. Of that, 433 million euros were for counterparties on two leveraged loans.

‘Deteriorating’ Credit Market

The company is monitoring provisions for risky loans as it faces a “deteriorating credit environment,” Chief Financial Officer Stefan Krause said on a conference call with analysts today. While the bank is “comfortable” with its loan book, “clearly we see rising loan-loss provisions,” he said.

Deutsche Bank said problem loans more than doubled to 8.2 billion euros in the quarter from a year earlier.

Banco Bilbao Vizcaya Argentaria SA, Spain’s second-largest lender, said that bad loans as a proportion of total lending climbed to 3.2 percent from 1.3 percent a year ago. Loans classed as “dubious” on BBVA’s books more than tripled to 7.8 billion euros from 2.5 billion euros a year ago.

The Bilbao, Spain-based bank said today the growth in bad loans slowed from the first quarter.

Capital Ratio

Earnings at Deutsche Bank were boosted by 377 million euros in pretax profit at the corporate investments unit, including gains from derivatives related to the acquisition of Deutsche Postbank AG shares and stake sales in companies such as Daimler AG and Linde AG. The bank paid 242 million euros in income taxes, down from 633 million euros in the first quarter, helped by tax-exempt asset disposals.

The board today approved the extension of Ackermann’s contract by three years to 2013. The Swiss native, who has resisted government aid, boosted the bank’s tier 1 capital ratio, a measure of solvency closely watched by regulators, to 11 percent in the second quarter.

The supervisory board, in a separate statement, also said board members didn’t authorize surveillance activities found in a spying probe, citing a report by law firm Cleary, Gottlieb, Steen & Hamilton.

Spying Scandal

“According to this report, the questionable methods used were not authorized by members of the supervisory board or the management board,” the supervisory board said in an e-mailed statement distributed by the Frankfurt-based company today.

Both boards acknowledged the report and “regret what took place,” the statement said. “Internal measures have been initiated to prevent similar incidents in the future.”

Deutsche Bank said July 22 that the law firm’s investigation found four cases where privacy laws may have been violated. The monitoring of a shareholder after Deutsche Bank’s annual meeting in 2006 took place following a discussion between the chairman of the supervisory board and the investor relations chief, Deutsche Bank said at the time. Clemens Boersig was chairman at the time and still holds that post.

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: July 28, 2009 12:08 EDT