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UPDATE 2-Deutsche Bank profit exceeds expectations despite weak market

* Q3 net profit rises to 649 mln eur vs 278 mln eur

* Bond-trading division revenues down 36 percent

* Cryan: "Revenue environment remained challenging" (Adds details of results and background)

FRANKFURT, Oct 26 (Reuters) - Deutsche Bank posted a rise in third-quarter net profit to 649 million euros ($768 million) on Thursday, despite a drop in investment bank revenue and a challenging market.

Germany's flagship lender said cost cuts helped lift profit despite a 10 percent drop in revenue as the bank undergoes a major restructuring.

Deutsche Bank beat expectations of analysts, who had forecast net income of 281 million euros after 278 million euros in the third quarter of last year, according to a Reuters poll.

"While the revenue environment remained challenging, we have made significant progress on our key initiatives," Chief Executive John Cryan said in a statement.

Shares in Deutsche Bank were seen opening 2.5 percent higher in pre-market trade following the results.

Deutsche Bank announced last March an overhaul that includes the integration of its Postbank retail bank unit with its own in-house Deutsche Bank-branded consumer bank, as well as the partial sale of its asset management unit.

"We are convinced that the benefits of our efforts will step by step become more apparent in the coming quarters and years," Cryan said.

Revenues at Deutsche Bank's cash-cow bond-trading division were 36 percent lower in the quarter due to decreased client activity in less volatile markets.

Deutsche's revenue lagged its U.S. peers. The big U.S. investment banks bond trading revenues fell on average 22 percent from a year earlier.

Deutsche Bank has cited progress on both of its overhaul initiatives - the retail bank and the asset management unit.

In a separate press release on retail bank integration, the bank reiterated that it was on track to realize more than 900 million euros ($1.1 billion) in cost synergies by 2020 with an investment of 1.9 billion euros.

Deutsche Bank said that the two retail banks were likely to merge as a single legal entity by the second quarter of 2018, pending regulatory approval.

But battles with unions loom. They are threatening strikes over job cuts and the closure of bank branches.

On the asset management front, Deutsche Bank has asked banks to pitch for work on an initial public offering (IPO) of its asset management business that could raise around 2 billion euros.

On Thursday, Deutsche Bank said it was strengthening its asset management unit by integrating parts of its Sal. Oppenheim subsidiary.

The bank has been recovering from multiple legal battles ranging from its role in the marketing of U.S. mortgage-backed securities to a so-called mirror trading scheme that could be used for money laundering.

On Wednesday, U.S. authorities announced that Deutsche Bank had agreed to pay $220 million to settle U.S. regulatory charges that it defrauded government and nonprofit entities by manipulating Libor and other benchmark interest rates.

Deutsche Banks feels that it faces a major headwind that U.S. competitors don't face - the European Central Bank's ultra low rates and cheap money.

Last month Cryan called on the ECB to change course. "The era of cheap money in Europe should come to an end - despite the strong euro," Cryan told a room full of bankers.

Low interest rates, money printing and a penalty charge for hoarding cash have been at the heart of attempts by the central bank to reinvigorate the 19-country euro zone economy in the wake of the 2008-09 financial crisis.

But the ECB's policy has imposed a cost on still fragile banks, turning deposits into a hot potato that many would rather avoid so as not to pay charges to their central bank for storing them. ($1 = 0.8451 euros) (Reporting by Tom Sims; Editing by Maria Sheahan and Muralikumar Anantharaman)