* Cryan tells staff will redouble revamp efforts
* Bank makes profit in Q3 but lags rivals
* CEO cautions situation will stay difficult
* Litigation reserves rise to 5.9 billion, non-RMBS related (Adds quotes from CEO, investor, analysts)
By Arno Schuetze and Anjuli Davies
FRANKFURT, Oct 27 (Reuters) - Deutsche Bank chiefJohn Cryan pledged to redouble restructuring efforts onThursday, warning that it faces tough times finalising talkswith U.S. justice authorities over a multi billion dollar fine.
Germany's biggest lender earlier posted an unexpectedquarterly profit, benefiting from a modest rebound in bondtrading, but failed to dispel the cloud of uncertainty thatdrove clients to withdraw billions of euros.
Cryan said on a conference call that the quarter had beenovershadowed by talks over the U.S. Department of Justice'ssettlement proposal relating to sales of RMBS (residentialmortgage-backed securities) which had caused uncertainty.
As well as having an impact on investor and client views ofthe bank, this uncertainty had also taken its toll on "financialplanning and strategy execution", Cryan added.
Cryan warned Deutsche Bank employees in a letter that thesituation "will stay difficult for a while" and said he wasworking to finalise the settlement "as soon as possible".
Deutsche Bank would also intensify a major restructuring tocounter a deteriorating environment for banking in Europe andelsewhere, Cryan said.
However, a top ten shareholder called on the bank'smanagement to make deeper cuts in its trading activities. "Fixedincome is still oversized in terms of cost and on group levelthere are still 10,000 staff too many."
Despite weeks of negative headlines, Deutsche was able toannounce an unexpected net profit of 278 million euros ($303million) in the third quarter, lifted by a surge in bond tradingthat boosted all Wall Street banks.
This sent its shares to a more than one-month high, but theyretreated in line with the market to be down 0.3 percent.
Deutsche Bank's Chief Financial Officer Marcus Schenck alsostruck a positive note, saying he expects the fourth quartertrading business overall to exceed last year's performance.
SPREADSHEET MYTH
Cryan said he was spending at least an hour a day explainingthe bank's position to clients, adding: "To dispel any myths, Idon't just sit poring over spreadsheets".
Negotiations over a $14 billion demand from the U.S. DoJ formisselling toxic mortgage-backed securities before the 2007-2009financial crisis have set a bleak backdrop for Cryan.
Thursday's results gave some insight into how this demandhas rocked confidence in Deutsche Bank, which plays a criticalrole in financing some of Germany's biggest companies.
In retail and wealth management, which had assets of almost440 billion euros, clients withdrew 9 billion euros in the thirdquarter, Deutsche Bank revealed. Outflows had since abated, itsaid, although its global markets trading business was also hit.
Cryan said the bank had liquidity reserves of 200 billioneuros, a fall from the more than 215 billion he had outlined onSept. 30. In June, the bank had 223 billion euros.
Deutsche Bank set aside more money for its legal bill fornumerous past missteps. Litigation reserves rose to 5.9 billionfrom 5.5 billion at the end of June.
However, Deutsche Bank has so far not made a specificproposal for what it would be willing to pay to settle the RMBScase and has therefore not upped its provisions for it. It hadhoped to settle the case for about $3 billion.
Revenue grew slightly at 7.5 billion euros, ahead ofanalysts' expectations, mainly driven by Deutsche's trading,while business declined in other operating areas.
"Top down, revenues were stronger and the bank is deliveringon costs with this quarter being a fourth consecutive one ofdeclining operating expenses," analysts at Morgan Stanley noted.
Its bond trading, which has volatile earnings and toughcapital requirements to meet, revenues were up 14 percent. Butthe rebound was less pronounced than at peers because of cutsDeutsche has made to the division. Barclays on Thursday reporteda 40 percent spike in its business.
In equities trading, Deutsche saw revenue fall as low stockmarket volatility gave investors less reason to trade, whilerevenue from corporate and investment banking fell by 1 percent. ($1 = 0.9173 euros) (Additional reporting by Kathrin Jones; Writing by JohnO'Donnell; Editing by David Holmes and Alexander Smith)
Barclays (BARC)
