* Q3 net profit rises to 649 mln eur vs 278 mln eur
* Revenue down 10 pct, prospects for Q4 muted
* Bond trading revenue down 36, equities down 16 pct
* Costs down 13.5 pct y-o-y on lower restructuring, litigation
* Shares down 1.6 percent (Adds shares, analyst comment)
By Tom Sims and Arno Schuetze
FRANKFURT, Oct 26 (Reuters) - Deutsche Bank posted a 10 percent drop in revenue in the third-quarter, reflecting a weak market and the effects of a major restructuring.
But Germany's flagship lender said on Thursday cost cuts helped lift profit above analysts' expectations. "While the revenue environment remained challenging, we have made significant progress on our key initiatives," Chief Executive John Cryan said in a statement.
Deutsche Bank last March announced an overhaul that includes the integration of its Postbank retail bank unit with its own in-house Deutsche Bank-branded consumer bank, as well as the partial sale of its asset management unit.
"We are convinced that the benefits of our efforts will step by step become more apparent in the coming quarters and years," Cryan said. However, the bank warned that the challenging market environment could continue in the fourth quarter.
Net profit rose to 649 million euros ($768 million), despite a drop in investment bank revenue. The bank beat an average analyst forecast for net income of 281 million euros, according to a Reuters poll, after 278 million a year ago.
Shares in Deutsche Bank were down 1.6 percent in early trading. "Deutsche Bank has a long, long way to go," said Octavio Marenzi, CEO and founder of consultancy Opimas.
Revenue at Deutsche Bank's cash-cow bond-trading division were 36 percent lower due to lower client activity in less volatile markets, lagging U.S. peers. The big U.S. investment banks’ bond trading revenues fell on average 22 percent from a year earlier.
Deutsche's overall market share in global investment banking market dropped to 3.3 percent from 3.6 percent, in part due to its decision to streamline the business. It is now seeking to gain market share with strategic hires and by resuming bonuses.
Deutsche Bank has cited progress on both of its overhaul initiatives, in the retail bank and asset management.
In the retail bank, Deutsche reiterated it was on track to realize more than 900 million euros in cost synergies by 2020 with an investment of 1.9 billion euros.
But battles loom with labour unions who are threatening strikes over job cuts and the closure of bank branches.
In asset management, Deutsche Bank has asked banks to pitch for work on an initial public offering (IPO) of its asset management business, which it wants to legally separate from the bank by year-end, in a deal that could raise around 2 billion euros.
Deutsche has been recovering from multiple legal battles, ranging from its role in the marketing of U.S. mortgage-backed securities to a so-called “mirror trading” scheme that could be used for money laundering.
Last year, a looming $14 billion fine from the U.S. Department of Justice had unsettled clients and investors and prompted talk of a government bailout. On Wednesday, U.S. authorities announced the latest settlement. ($1 = 0.8451 euros) (Editing by Maria Sheahan and Muralikumar Anantharaman)