July 2 (Bloomberg) -- Deutsche Bank AG and UBS AG led a decline in the cost of protecting European bank bonds from default after the lenders said they won't have to raise more capital to make up for credit-market writedowns.

Credit-default swaps on Frankfurt-based Deutsche Bank, Germany's biggest lender, dropped the most in 10 weeks, falling 6.5 basis points to 96, according to JPMorgan Chase & Co. at 1:25 p.m. in London. Contracts on UBS, the biggest wealth manager, fell 2.5 to 128 and the benchmark Markit iTraxx Financial index declined 3 to 93.

Deutsche Bank said today it will report a profit in the second quarter and UBS Chairman Peter Kurer said the Zurich- based lender won't ask investors for new funds. The worst of debt-related losses and writedowns are over for Europe's banks, JPMorgan analysts wrote in a note to clients today.

``Bank earnings probably have seen the worst,'' said Willem Sels, head of credit strategy at Dresdner Kleinwort in London. ``The wave of equity issuance is slowing, but I'd be reluctant to say no-one needs to raise capital anymore.''

Sels recommends investors should be ``underweight'' corporate debt, meaning they should hold less than indicated by benchmark indexes.

UBS got $29.4 billion from investors this year, driving the total amount of new capital raised by European banks to $147 billion since the credit crisis started in 2007. The new funds helped compensate for $203 billion of losses and markdowns caused by the collapse of the U.S. housing market.

Earnings Uncertainty

Kurer told Swiss newspaper Finanz & Wirtschaft that ``uncertainty about the quarterly earnings,'' is among factors weighing on the bank's share price, which has fallen 55 percent this year. UBS spokeswoman Sabine Woessner said the report was accurate.

``We do not believe that further capital raising is needed at this point,'' the JPMorgan analysts, led by London-based Kian Abouhossein, wrote. ``The worst of the markdowns seems to be over.''

Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality; a decline, the opposite.

In the U.S., the CDX North America Investment Grade Index dropped 0.5 basis point to 138.5, according to Phoenix Partners Group in New York.

Credit-default swaps on Citigroup Inc., the biggest U.S. bank by assets, fell the most since April 7, declining 13 basis points to 133, CMA Datavision prices show.

A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

Contracts on the Markit iTraxx Europe index of 125 companies with investment-grade ratings declined 1 basis points to 104, JPMorgan prices show.

The Markit iTraxx Crossover Index of 50 companies with mostly high-risk, high-yield credit ratings dropped 3 basis points to 528 basis points.

To contact the reporter on this story: Abigail Moses in London Amoses5@bloomberg.net

Last Updated: July 2, 2008 08:33 EDT