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* Second quarter pretax 792 mln euros vs 1.3 bln poll
* Legal provisions hiked by 630 mln euros
* Bank to cut assets to keep leverage ratio at 3 pct (Adds CFO comment)
By Edward Taylor and Arno Schuetze
FRANKFURT, July 30 (Reuters) - Deutsche Bank AG warned on Tuesday it will face hundreds of millions of euros incosts for litigation and compliance with new bank rules afterreporting weaker-than-expected second quarter earnings.
The new regulatory costs follow a push by bank watchdogs tomake global lenders beef up capital or cut their balance sheetsto reduce risk. This will force Germany's flagship bank toearmark an additional 250 billion euros ($331.34 billion) inassets which can be cut, a move which will reduce revenues.
Shedding these assets could result in 600 million eurosworth of one-off costs and 300 million euros in missed pretaxprofit, the bank said.
"We are committed to further reducing (the) balance sheet ina manner that enables us to meet requirements on (the) leverageratio," Co-Chief Executives Juergen Fitschen and Anshu Jain saidin a joint statement.
Regulators are keen on using the leverage ratio to gauge abank's strength. This compares a bank's shareholder equity toits total assets without using a bank's own risk weightings.
Deutsche said it will seek to achieve a leverage ratio of 3percent under the more stringent bank safety rules afterregulators questioned the bank's ability to absorb financialshocks in a possible future crisis.
The Frankfurt-based group also has raft of legal costsrelated to the sale of residential mortgage-backed securities,allegations it manipulated global benchmark interest rates and adispute with the representatives of deceased media magnate LeoKirch.
"We expect settlements to accelerate in the comingquarters," Jain said, without elaborating on which legal issueswere on track to be resolved. The majority of legal issuesrelate to business from the investment bank, Deutsche said.
In the second quarter, litigation provisions were 630million euros.
Germany's flagship lender posted an 18 percent fall insecond-quarter pretax profit to 792 million euros, well belowthe 1.3 billion forecast by analysts in a Reuters poll.
Revenues from sales and trading of debt and other productsfell 11 percent year-on-year, leading some analysts to questionDeutsche's earnings prowess in fixed income, an area which wasoften a key driver of earnings for the bank.
FIXED INCOME "PEARL"
Philipp Haessler bank analyst at Equinet said, "The fixedincome pearl has not lost its lustre but it didn't perform aswell in Europe as it did in the U.S., where U.S. peers arestronger."
So far this reporting season, investment banking rivals likeMorgan Stanley, Goldman Sachs, JPMorgan Chase &Co, and Bank of America Corp have beat analysts'profit expectations, thanks largely to strength in trading andunderwriting.
Co-chief executive Jain insisted the bank had not lost itscompetitive edge. "Deutsche Bank is on course despite continuedheadwinds we face," Jain told analysts.
Deutsche Bank expects its asset reduction programme to becompleted by 2015, Chief Financial Officer Stefan Krause said. Around 3.3 billion euros worth of assets had already beenreduced by changing the risk model on some of the assets in itsPostbank unit.
The bank had already raised capital in April to bolster itsfinances. But since then one of the top U.S. regulators, ThomasHoenig, Federal Deposit Insurance Corp vice chairman, calledDeutsche Bank "horribly undercapitalized."
Deutsche's shares fell 3.6 percent, making it the biggestfaller among European banks after Barclays, which fellsharply after announcing a share issue.
Since June 1, 2012 when Deutsche's new leadership took over,the bank's share price has risen 32 percent, but has lagged keypeers and the STOXX Europe 600 banking sector, which hasjumped 47 percent.
By contrast, JP Morgan shares have gained 63 percent and UBS58 percent, Thomson Reuters data show. http://link.reuters.com/kag99t.
($1 = 0.7545 euros) (Editing by David Holmes and Jane Merriman)
