Authors: Tom Sims, Matthias Inverardi and Emma-Victoria Farr

FRANKFURT (Reuters) – Deutsche Bank raised its bad loan outlook amid a feeble German economy, after returning to profits in the third quarter, helped by investment banking and a cut in provisions for Postbank’s lawsuits.

It was the second time in the past few months that Germany’s largest bank increased its bad debt reserve forecasts. The bank’s shares were down 3% by noon.

“The difficult German economic environment appears to have begun to impact Deutsche Bank’s revenues,” JPMorgan said in a note.

The International Monetary Fund has just warned that the German economy will stagnate this year, which contrasts with growth expectations in all other G7 countries.

Deutsche’s 15-quarter winning streak was interrupted in the second quarter after the bank created a huge provision for Postbank’s lawsuits. Deutsche has since settled some issues and reduced reserves by 440 million euros ($475 million), which helped boost profits.

The bank also announced that it was applying for the repurchase of shares, which was suspended due to Postbank’s problems.

Deutsche Bank raised its loan loss provisions forecast to 38 basis points for loans in 2024, up from a previous forecast of just above 30 basis points. That would mean reserves for the full year would be about 1.8 billion euros, up from 1.5 billion last year, finance chief James von Moltke said.

Von Moltke told reporters that integration problems at Postbank were partly to blame for the raise in reserves, as the problems affected the bank’s ability to pursue defaulting borrowers.

RBC said the raise in loan loss provisions was disappointing but “a reflection of the environment rather than company specifics.”

Net profit attributable to shareholders amounted to EUR 1.461 billion in the quarter, 42% more than a year earlier and was in line with expectations. In the second quarter, it recorded a loss of EUR 143 million.

Postbank’s lawsuit – which has been pending in the courts for years – alleges that the bank paid too little during the takeover of Postbank.

The purchase of a no-frills lender with millions of customers and roots in the country’s postal system began during the global financial crisis and was intended to expand Deutsche’s reach in Germany while gaining a steady source of revenue.

In April, Deutsche said that while it strongly disputes these claims, it had decided to record a €1.3 billion reserve for these matters.

Some of these lawsuits have been settled, but some are unresolved. On Wednesday, a court in Cologne issued a ruling against Deutsche Bank in favor of some investors. Deutsche said it would review the ruling but believed it was essentially fully protected from any financial hits.

Deutsche’s biggest performer this quarter was the investment bank, whose revenue rose 11% from a year earlier, above expectations for 6.5% growth, mirroring a sturdy third quarter at rivals such as JPMorgan and Goldman Sachs.

However, revenues at Deutsche’s two other huge divisions were feeble.

Revenues in the retail segment, which includes Postbank, remained unchanged, in line with expectations. At the corporate bank, revenues fell by 3%, while analysts expected growth of just under 1%.

Both divisions have benefited from higher interest rates, and these gains will decline as the European Central Bank cuts interest rates.

At the investment bank, revenues from fixed income and currency trading, one of the bank’s largest businesses, rose 11%, better than expected growth of 4.6%.

Origination and Consulting had a sturdy quarter, with revenue up 24% compared to expectations for growth of 19%.

Deutsche Bank is one of several huge European banks reporting results this week and next. The sector is expected to show continued profitability, with solid investment banking activity offsetting degenerating margins and feeble loan demand.

Italy’s UniCredit’s has renewed its focus on mergers and acquisitions in European banking, pushing for a possible tie-up with Deutsche Bank rival Commerzbank (ETR :), prompting speculation that Deutsche could join the fray.

However, Deutsche officials downplay such ideas, saying they are focused on their own strategy.

Deutsche still has more work to do “before we jump into the ring,” von Moltke said.

($1 = 0.9257 euros)