July 31 (Bloomberg) -- Deutsche Bank AG, Germany's largest bank, said second-quarter profit fell 64 percent as 2.3 billion euros ($3.6 billion) in writedowns led to a second straight loss at its securities unit.

Net income declined to 649 million euros, or 1.27 euros a share, from 1.78 billion euros, or 3.60 euros, a year ago, the Frankfurt-based bank said on its Web site today. Earnings beat the 491 million-euro median estimate of 19 analysts surveyed by Bloomberg after a year-earlier tax charge wasn't repeated.

Chief Executive Officer Josef Ackermann said he ``remains cautious'' after the investment bank posted a 311 million-euro pretax loss on markdowns of mortgage securities, loans and debt backed by bond insurers. Deutsche Bank sidestepped the worst of the subprime contagion, which led to record losses and capital raisings at UBS AG and Merrill Lynch & Co.

``Compared to the U.S. banks and UBS, there's a world of difference,'' said Juergen Meyer, a fund manager at SEB Asset Management with the equivalent of $2.2 billion under management, including Deutsche Bank shares. ``In the current market, it isn't a given that a bank remains profitable.''

Deutsche Bank was unchanged at 58.83 euros by 9:19 a.m. in Frankfurt trading, leaving declines this year at 34 percent and valuing the company at 31.2 billion euros. The 71-company Bloomberg Europe Banks and Financial Services Index has fallen 31 percent in 2008.

Mortgage Writedowns

The company reduced the value of residential mortgage-backed securities, mostly so-called Alt-A mortgages, by 1 billion euros. It reported markdowns of 530 million euros on assets secured by bond insurers and 309 million euros on commercial real estate loans. Loans for leveraged buyouts were written down by 200 million euros, and other investments by 203 million euros.

Deutsche Bank's second-quarter markdowns bring its total to about 7.3 billion euros. The collapse of the U.S. subprime mortgage market has led to $476 billion of credit losses and writedowns at financial institutions globally, data compiled by Bloomberg show.

Merrill Lynch, the third-biggest U.S. securities firm, said on July 28 it will sell $8.55 billion of stock and liquidate $30.6 billion of bonds at a fifth of their face value to shore up credit ratings imperiled by $52 billion in mortgage losses. Zurich-based UBS, the largest Swiss bank, has recorded about $38 billion of markdowns.

`Cautious' for 2008

``We remain cautious for the remainder of 2008,'' Ackermann, 60, said in a statement. ``We will continue to strictly manage cost, risk and capital, and to reduce our exposures in key areas.''

The investment bank's loss compares with a profit of 1.75 billion euros a year earlier and exceeds the 154 million-euro loss estimated by analysts. The division, led by Anshu Jain and Michael Cohrs, posted a 79 percent decline in fixed-income sales and trading revenue to 602 million euros. Equities sales and trading revenue fell 41 percent to 830 million euros.

Pretax profit from consumer banking, asset management and global transaction banking rose 2.2 percent to 854 million euros from 836 million euros a year earlier. The so-called stable businesses generated about a third of the bank's pretax profit last year. The consumer business, boosted by the acquisitions of Germany's Norisbank and Berliner Bank in 2006, reported record quarterly pretax profit of 328 million euros.

Capital Ratio Rises

Deutsche Bank's earnings in the second quarter were helped by a tax surplus of 3 million euros, compared with a tax expense of 922 million euros a year earlier. Profit was also boosted by 241 million euros from asset sales, including shares in Daimler AG, the world's second-biggest luxury carmaker, and Allianz SE.

The tier 1 capital ratio, which regulators monitor to assess a bank's ability to absorb loan losses, rose to 9.3 percent at the end of June from 9.2 percent on March 31. The bank's target range is 8 percent to 9 percent.

``The fact that Deutsche Bank's tier 1 capital ratio is above their target range shows that they don't have a need to raise capital,'' said Andreas Weese, a Munich-based analyst at UniCredit SpA who has a ``buy'' recommendation on Deutsche Bank.

Financial institutions worldwide have been forced to seek $355 million from investors to replenish reserves after subprime- related losses. Deutsche Bank, which posted its first loss in five years in the first quarter, said on July 2 that it wouldn't need additional funds.

Remaining Holdings

Following sales and writedowns, the bank had leveraged finance holdings of 24.5 billion euros at the end of June, down from 30.2 billion euros at the end of the first quarter.

Demand for high-risk, high-yield loans in Europe has fallen during the credit crunch that began last year, driving sales down about 80 percent to $61 billion from $299 billion, Bloomberg data show. Lenders have been forced to sell loans for as low as 65 cents on the dollar to attract buyers.

The bank reduced the volume of U.S. residential mortgage- backed securities to 5.9 billion euros from 7 billion euros and U.S. subprime-related investments were cut to 1.4 billion euros from 1.8 billion euros. The bank also reduced the value of its commercial property financing to 10.7 billion euros from 14.4 billion euros.

Deutsche Bank increased the number of employees in the quarter by 1,978 to 80,253, while trimming headcount at the corporate and investment bank by 25 workers. The world's biggest banks and securities firms have announced about 100,000 job cuts in the past year, according to Bloomberg data.

`No Pressure'

Deutsche Bank is facing pressure from shareholders to buy a German consumer lender such as Deutsche Postbank AG to reduce dependence on investment banking, which accounted for about 65 percent of pretax earnings in 2006.

``We will continue to invest in all our core businesses, both organically and by acquisition, but we will not relax our discipline,'' Ackermann said in a statement today. ``We are under no pressure to make acquisitions.''

Ackermann said in May he wouldn't ``stand on the sidelines'' as Postbank and Allianz's Dresdner Bank came up for sale. Deutsche Bank lost out to Credit Mutuel Group this month in bidding for the German retail lending unit of Citigroup Inc., which the Paris-based customer-owned bank agreed to buy for 4.9 billion euros in cash.

Deutsche Post AG, Europe's biggest postal service, said last month it was holding ``exploratory'' talks about a sale of its majority stake in Postbank. The company said today it's in discussions with ``several'' partners. Ackermann said on May 29 he'd be interested in buying Postbank for a reasonable price.

A takeover of the Bonn-based lender, Germany's biggest consumer bank by clients, would add about 14.5 million customers to the 9.7 million Deutsche Bank currently has, and almost double the branch network to more than 1,800 in Germany. The purchase would also add about 1 billion euros in pretax profit.

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

Last Updated: July 31, 2008 03:21 EDT