By Eyk Henning 

FRANKFURT-- Deutsche Bank AG's embattled top management surprised investors Thursday by reporting a return to profit on lower litigation reserves and higher investment-banking revenues.

But co-Chief Executives Anshu Jain and Jürgen Fitschen said heavy legal expenses and regulatory burdens still loom over the bank and indicated further cost cuts are necessary to regain investors' favor.

Germany's largest bank posted an unexpected net profit of EUR438 million ($494 million) in the quarter ended Dec. 31. The average of analysts' forecast was for a EUR289 million loss, according to a poll by The Wall Street Journal. The bank reported a EUR1.4 billion loss in the fourth quarter a year earlier. Deutsche Bank shares were up 2.7% in afternoon trading in Frankfurt.

"While we are encouraged by many of our full-year and fourth-quarter business results, we are working hard to further manage our cost base...and increase our returns to shareholders," the co-CEOs said in a statement.

The bank acknowledged that there is potential bad news to come. The lower litigation reserves were largely an issue of timing and legal disputes could squeeze profits in the near future. Management also suggested it may lower its profit targets for this year.

Deutsche Bank is currently finishing a strategic review. The co-CEOs indicated the plan, to be presented this spring, will focus on boosting efficiency and returns. "We need to cut costs," and trim the bank's balance sheet, Messrs. Jain and Fitschen said in conference calls with analysts and journalists.

The executives are under pressure to accelerate the bank's turnaround and improve results because its share price has lagged behind those of international rivals over the past year. The two men declined to comment on whether they might sell or float Deutsche's Postbank retail subsidiary, which is an option on the table, according to people familiar with the matter.

Performance targets "continue to be challenging," said finance and strategy chief Stefan Krause. Mr. Krause, who said the bank will update profit forecasts in the near future, pointed out that a levy that feeds Germany's bank-rescue fund will be "some hundred million [euros] higher" than the EUR148 million levied in 2014 and be booked predominantly in the first quarter

In the fourth quarter, Deutsche Bank's revenue rose by 19% to EUR7.8 billion. The bank's typically strong fixed-income and currency-trading activities underpinned the growth, with revenue up 13% to EUR1.1 billion. That is above what many analysts expected and better than U.S. rivals including Citigroup Inc., J.P. Morgan Chase & Co. and Goldman Sachs Group., The U.S. banks' fixed-income, currency- and commodity-trading revenue declined by 23% on average in the fourth quarter, according to Morgan Stanley.

Mr. Jain's strategy to keep Deutshce Bank's fixed-income and currency-trading operations largely intact, in contrast with many European rivals, for now appears to be paying off. "We've seen the typical seasonal pick up in this year's first-quarter [fixed-income] trading compared with last year," Mr. Jain said. The operations have more room to cut costs and shrink their balance sheet, he said.

Deutsche's entire investment banking business reported a 34% rise in pretax profit to EUR516 million.

The bank's fourth-quarter results also improved because it set aside just EUR207 million to cover potential fines from looming litigation, below the EUR1.11 billion in provisions a year earlier and less than the EUR900 million Morgan Stanley analysts had expected.

The decrease was due to delayed settlement talks in some important cases, the bank said. "We don't expect litigation will be lower," Mr. Krause said. "We aren't in control of timing in settlements."

Deutsche Bank is among a group of global lenders under investigation for their alleged role in manipulating the London interbank offered rate, or Libor, and currency fixings, and of violating U.S. sanctions for embargoed countries like Iran. While regulators privately say that Libor investigations are largely completed and could be settled in the first half of this year, investigations into the bank's alleged involvement in foreign-exchange markets will drag into the second half of the year.

As of now, Deutsche Bank has a total EUR3.2 billion in reserves to cover potential legal fines.

Deutsche Bank's retail operations made a EUR55 million pretax profit, compared with EUR370 million expected by analysts and EUR218 million reported in the fourth quarter a year earlier. The decline was due in part to a provision of more than EUR330 million for potential claims from retail-banking clients following a recent verdict from Germany's Supreme Court that affects the wider German banking industry. Analysts hadn't included the hit in their estimates.

Results at Deutsche Bank's retail unit were also weighed down by high costs for the integration of Postbank. Deutsche aims to reap more than EUR1 billion in annual synergies once the integration finishes. The bank's two other main units, asset and wealth management and global transaction banking, recorded better pretax profit on higher revenue and lower costs.

Write to Eyk Henning at eyk.henning@wsj.com

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