Deutsche Bank AG's â,¬5.8 billion ($6.5 billion) write-down and bonus warning to employees are positive signs that executives are digging in to cut costs while managing tougher regulatory constraints, analysts said Thursday.

But analysts also warned that uncertainty over legal bills and the long-term effectiveness of a companywide restructuring still weigh on Germany's biggest lender.

The moves are "painful steps in the right direction," UBS Group AG banking analysts Daniele Brupbacher and Mate Nemes wrote in a research note on Thursday morning, adding that Deutsche bank is "paving the way for streamlining the bank's business portfolio" ahead of disclosing more strategy details later this month.

The German lender late Wednesday night, in disclosing the impairment charges on its investment-, retail- and private-bank assets, acknowledged that its dominant investment bank can't churn out the long-term profits it once did, in large part because of tighter regulatory requirements.

It also warned that it might trim or altogether scrap its dividend this year.

In a memo to employees Wednesday night, new co-chief executive John Cryan separately zeroed in on something both investors and employees care about. The former UBS Group AG finance chief, known for cost-cutting at the Swiss bank amid a government-led rescue, said Deutsche Bank employees will share some of the lender's financial pain, signaling that year-end bonuses will shrink.

Deutsche Bank said it expects a â,¬6.2 billion third-quarter loss when it unveils details of companywide strategy plans Oct. 29.

"You have my personal commitment to try to achieve a fair balance between staff and shareholder interests," Mr. Cryan wrote in the memo, which was also posted on the bank's public website.

The write-downs and other steps are aimed at helping assure investors that Deutsche Bank, which has been beset by regulatory missteps and shortcomings related to cost-cutting and financial performance, is making difficult changes necessary to narrow its focus and improve performance.

Analysts are divided on Deutsche Bank's ability to avoid raising capital in coming months, which depends on still-unknown litigation costs, economic conditions and the effectiveness of companywide cost-cutting and technology and compliance initiatives.

The bank hasn't ruled out a capital raise, but Mr. Cryan said in July, his first month on the job, that doing so wouldn't solve the bank's fundamental expense issues and wouldn't be "in the interests of shareholders."

Citigroup Inc. banking analysts Andrew Coombs and Nicholas Herman said in a Thursday-morning note that Mr. Cryan is "clearing the decks" with the big impairment charges ahead of announcing detailed cost targets. They called the need for more capital "inevitable," especially if litigation costs soar as they expect. "However we think a capital increase is unlikely until 2016, after the cost saves and strategy has been bed down," they wrote, adding that the bank could need to raise up to €6 billion.

Goldman Sachs Group Inc. analyst Jernej Omahen said in a Thursday note that Deutsche Bank's announcement "confirms our view that the task facing new management is very demanding," noting that outstanding litigation issues and the broader "'fixing' of Deutsche Bank" will take several years to resolve.

Deutsche Bank said it was setting aside another €1.2 billion for litigation charges. Analysts and investors view a top potential cost—an open investigation into potential money-laundering activities connected to the bank's Russia business—as still difficult to estimate. The bank didn't specify which of numerous regulatory investigations are connected to the added reserves.

Deutsche Bank shares initially fell around 7% in after-hours trading in Germany on Wednesday night after market close following the write-down disclosure, before regaining some ground. Shares were up less than 1% Thursday morning.

Another challenge Deutsche Bank faces is retaining employees and clients as it dials back compensation, trims businesses and potentially all but pulls out of some countries. Some 18,000 employees alone are expected to be shed eventually as Deutsche Bank hives off the Postbank retail operation it bought for more than €6 billion under former CEO Josef Ackermann in several stages starting in 2008.

The Postbank disposal will be complicated, possibly requiring several steps over the next couple of years, according to market participants. Mr. Cryan said in July that Deutsche Bank "will execute it as expeditiously and effectively as possible."

Write to Jenny Strasburg at jenny.strasburg@wsj.com and Madeleine Nissen at Madeleine.Nissen@wsj.com

 

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(END) Dow Jones Newswires

October 08, 2015 09:45 ET (13:45 GMT)

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