Deutsche Bank on Wednesday reported a sharp fall in third-quarter profits before tax due to large write-downs on losses in the credit markets, but the result was ahead of its guidance issued earlier this month.

Germany’s biggest bank said pre-tax earnings fell 19 per cent to €1.4bn ($2.02bn) in the three months to the end of September, when concerns about the US housing downturn spread to the credit markets and triggered liquidity shortages and sharp losses at many banks and investment funds.

Profits were dragged down by write-downs of €603m on leveraged loans and commitments, net of fees, to private equity groups that were stuck on Deutsche Bank’s balance sheet after investors shied away from risky assets. It also took a €1.56bn hit in its debt and equity trading operations, including mortgage-backed securities and structured products.

The charges dragged the corporate banking and securities business, Deutsche’s investment bank, into a quarterly loss of €179m, after net revenues more than halved.

“The third quarter of 2007 was a period of exceptional turbulence in financial markets. In investment banking, our performance was significantly impacted by this extremely challenging environment,” said Josef Ackermann, chief executive.

However, he added that its businesses outside investment banking, such as retail banking and asset management, had performed well in the quarter, leading to a “satisfactory result” overall.

The pre-tax profit was above the minimum of about €1.2bn that Mr Ackermann had indicated on October 3, which was also the figure bank analysts expected. Net profits rose 31 per cent to €1.6bn, mainly due to €600m in tax benefits in the quarter compared with the same period last year.

Shares in Deutsche Bank were €3.97 or 4.5 per cent higher at €92.77 in afternoon Frankfurt trading.

Despite the large losses, Deutsche Bank’s results were markedly better than those of UBS of Switzerland and Merrill Lynch, the US investment bank that on Tuesday parted company with Stan O’Neill, its chief executive. Both banks reported quarterly losses, triggered by credit market-related write-downs.

Concerns that Deutsche, which is one of the biggest players in the fixed income market, would be hit particularly hard by the credit turmoil has pushed the stock down more than 15 per cent this summer to a one-year low.

Mr Ackermann on Wednesday gave a cautiously optimistic outlook. “Looking forward, challenges undoubtedly remain; however, this is also a time of opportunity for Deutsche Bank. As a market leader in investment banking, and a major global asset gatherer, we stand to benefit from the flight to quality,” he said.

“We have made a positive start to the fourth quarter,” the chief executive added , as he reiterated the bank’s 2008 performance targets.

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