July 30, 2010 – * MUFG Q1 net doubles to Y166.4 bln vs Citi's 140 bln view
* Mizuho net profit Y150 bln vs 4.5 bln loss a year ago
* Both firms retain full-year profit forecast
* DBS in surprise S$300 mln Q2 loss on goodwill charge
* MUFG shrs end down 1 pct before results; Mizuho off 1.5 pct
By Taiga Uranaka and Kim Yeon-hee
TOKYO/SEOUL, July 30 (Reuters) - Mitsubishi UFJ Financial Group and Mizuho Financial Group stuck with their full-year profit forecast, suggesting a tough year, after Japan's top two banks reported strong quarterly earnings.
Japanese banks, including No.3 player Sumitomo Mitsui Financial Group, have benefited from fewer bankruptcies in April-June on an uptick in the world's second-biggest economy. Gains in their bond portfolios also helped.
But weak loan demand and sluggish business and household spending indicates the recovery never gained traction. Latest production data, which showed factory output marking its biggest fall in more than a year, bodes ill for the upturn.
"I am not sure such performance will be repeated in quarters ahead," said Chikako Horiuchi, analyst at Fitch Ratings in Tokyo, referring to earnings of the top Japanese banks.
"Unless they see recovery in their core banking businesses, -- lending and fee businesses -- they cannot call it real recovery."
Profits from the Japanese lenders contrasted with surprise quarterly losses at Singapore's DBS Group Holdings and South Korea's KB Financial Group, where newly appointed top executives sought to clean up the banks' books.
New global capital rules for banks under the Basel III accord to be finalized later this year add another layer of uncertainty for the Japanese banks, though draft rules show they could be less onerous than originally feared.
The lenders, among the worst capitalized globally last year, have raised tens of billions of dollars partly to prepare for the new capital rules.
They are now under pressure to draw up a viable growth strategy in the face of weak economic prospects at home to justify their massive fundraisings.
MUFG, which bought a 21 percent stake in Morgan Stanley at the peak of the financial crisis, has been stepping up efforts to expand revenue sources, including a brokerage venture with Morgan Stanley launched earlier this year in Japan.
MUFG is trying to tap growing economies in Asia, with a key focus on China. It is also eyeing a bigger presence in the United States, where it acquired two small failed banks this year through its Union Bank unit and hopes to make more buys.
NOT ENOUGH CAPITAL?
Mizuho, which has raised $14.6 billion in two rounds of fundraising in the last 12 months, has been streamlining its headquarters' operations and expanding its Asian businesses.
"At this moment, we are not yet certain whether Japan't top banks already have enough capital for new rules," said Fitch Ratings' Horiuchi, referring to Basel III.
MUFG posted a net profit of 166.4 billion yen ($1.9 billion) for April-June, up from 75.9 billion yen. Citigroup Analyst Hironari Nozaki had forecast a profit of 140 billion yen.
Mizuho's profit came in at 149.8 billion yen ($1.7 billion) for the quarter, up from a 4.5 billion yen loss, when it was hit by bad derivatives bets. It was its best quarterly profit in three years.
DBS, Southeast Asia's biggest bank, posted its first quarterly loss in almost five years after booking a $749 million goodwill charge for its Hong Kong business.
South Korea's No. 2 banking group by market value, KB Financial, posted its first quarterly net loss, dented by hefty provisions for riskier assets in the property market.
KB's assets are heavily skewed towards builders and the housing market, compared with rival Shinhan Financial Group, and its credit risk has risen due to the prolonged slump in the housing sector.
KB set aside 1.5 trillion won in loan-loss reserves for the quarter, far bigger than analysts' estimates of 700 billion won.
MUFG and Mizuho shares ended down 1 percent and 1.5 percent, respectively, ahead of the results. DBS was trading down 0.3 percent, while KB closed 1.5 percent lower before the results. (Writing by Muralikumar Anantharaman; Editing by Anshuman Daga)
