* Shares up more than 3 percent
* Investment bank results flattered by non-cash gain
* Quarterly results largely in line with expectations (Adds CEO quotes from staff memo, analyst comments)
By Thomas Atkins
FRANKFURT, July 30 (Reuters) - Deutsche Bank’s new boss hit out at staff in a memo on Thursday saying performance was “nowhere good enough” after Germany’s largest bank warned that its turnaround was at risk from heavy legal charges.
New chief executive John Cryan said “wasteful” cost increases had gobbled up revenue. “The status quo is not an option,” he said in staff memo after the bank reported a second-quarter net profit of 818 million euros, slightly better than expected.
The bank set aside 1.2 billion euros ($1.3 billion) for fines and settlements and said it might not reach its 2020 performance targets, which include a return on tangible equity of over 10 percent compared to 5.7 percent now, should fines and settlements continue to batter its bottom line.
The results are Deutsche Bank’s first under Cryan, who took over in July after the early departure of co-chief executives Anshu Jain and Juergen Fitschen was announced.
Investors expect Cryan to lead big changes at Deutsche, which has been hit by scandals and fines. It the lowest-ranking global investment bank when measured by its price to book ratio of around 0.6.
“Cryan has a different focus from Jain. He cares less about market share and league tables, rather that costs are too high and there are too many low-yielding assets on the balance sheet,” analyst Dirk Becker at brokerage KeplerCheuvreux said.
Cryan is one of four new chief executives seeking to overhaul some of Europe’s major banks, which have taken longer to recover from the financial crisis than North American rivals. They include Standard Chartered, Credit Suisse , and Barclays.
All face problems with heavy costs and shifting regulatory sands that have forced banks to set aside increasing amounts of capital to meet new safety requirements.
Deutsche Bank is embroiled in a public dispute with its German supervisor Bafin over its management controls.
As part of a 5-year strategic overhaul that Cryan has said he will stick with, Deutsche aims to cut some 4.7 billion euros more in costs, carve out 150 billion euros in investment bank assets, sell its Postbank retail division via a stock market listing.
“Our challenges are also evident in the unacceptably high level of our costs, our continuing burden of heavy litigation charges, a balance sheet that must be more efficient, and the poor overall returns to our shareholders,” said Cryan, who will reveal details of the overhaul in October.
In the quarter, investment bank revenue rose 23 percent to 4.3 billion euros, fueled by big gains in income from trading stocks and bonds. But the division’s results were flattered by a 213 million accounting gain in derivatives positions due to hedging.
“Without these one-off effects, bond trading was weaker than in the year-ago quarter. The numbers paint a picture that is anything but rosy,” analyst Ingo Frommen at bank LBBW, said.
Adjusted pretax earnings at the investment bank fell to 1.34 billion in the second quarter from 1.36 billion euros in the year earlier period.
The bank has been hit by supervisors on both sides of the Atlantic in the past three years and has paid more than 9 billion euros in fines and settlements since 2012, slowing restructuring attempts.
The 1.2 billion euros in legal costs was roughly double what analysts had predicted, while net profit of 818 million euros was well above the 238 million euros on year ago and slightly better than expectations, according to a Reuters poll. ($1 = 0.9133 euros) (additional reporting by Arno Schuetze; Editing by Jane Merriman)