Nov. 14 (Bloomberg) -- Aozora Bank Ltd., the Japanese lender controlled by Cerberus Capital Management LP, and Sumitomo Trust & Banking Co. scrapped profit targets as the slowing global economy fueled rising corporate bankruptcies and bad loans.

Aozora forecast a 27 billion yen ($279 million) loss for the year to March 31, while Sumitomo Trust, the nation's fifth- biggest bank by revenue, cuts its profit estimate for the second time in five weeks. Sumitomo Mitsui Financial Group Inc., the third-largest lender, said today bad-loan costs more than doubled in the first half.

Japanese banks may face additional losses on shareholdings and bad debts as the nation's economy heads toward a recession. The Nikkei 225 Stock Average tumbled 24 percent in October, the biggest monthly drop on record, while corporate bankruptcies rose to a three-year high.

``There are two big headwinds that the banks are facing,'' David Threadgold, an analyst at Fox-Pitt Kelton in Tokyo, said in a Bloomberg Television interview today. ``Much of their capital is invested in the Tokyo stock market, so that is causing a very big headache for them. The other is domestic credit deterioration.''

Resona Holdings Inc., Japan's fourth-biggest bank by market value, said today bad-loan costs increased almost fivefold to 133.4 billion yen in the fiscal first half ended Sept. 30 from a year earlier.

MUFG, Mizuho Raise Capital

Sumitomo Trust trimmed gains in Tokyo trading after its forecast revision, closing up 3.7 percent at 425 yen. Aozora, whose stock has plunged 76 percent this year, fell 4.8 percent to close at 79 yen before the earnings announcement.

An 84-company index tracking Japanese lenders has dropped 45 percent this year, compared with a 43 percent drop in the benchmark Topix Index.

The nation's five biggest banks cut their full-year profit estimates by a combined 1.16 trillion yen last month. Mitsubishi UFJ Financial Group Inc., the largest lender, said Oct. 27 it planned to sell as much as 990 billion yen of stock to shore up its capital. Mizuho Financial Group Inc., the second-biggest by revenue, said yesterday it plans to sell as much as 300 billion yen in preferred securities.

``Raising capital is a red flag that there are more losses to come at the banks,'' said Edwin Merner, president of Atlantis Investment Research Corp. in Tokyo, whose parent company manages about $3 billion. ``Liabilities rising at a faster pace than the number of bankruptcies is a sign that larger companies are going bankrupt.''

Bankruptcies Surge

The number of companies in Japan filing for bankruptcy increased 14 percent to 1,231 in October, the most since at least April 2005, according to data released by research company Teikoku Databank Ltd. Liabilities at bankrupt companies more than doubled to 979 billion yen from 441.7 billion yen.

``The environment for financial institutions is becoming more severe,'' Bank of Japan board member Seiji Nakamura said at a press briefing in Matsuyama, western Japan, yesterday. Even as interest rates decline, borrowing conditions are becoming tighter as the deepening economic slowdown makes banks reluctant to lend, he said.

The central bank cut its benchmark lending rate to 0.3 percent from 0.5 percent last month after exports to the U.S. fell 10.9 percent in September from a year earlier and the government said the nation may already be in a recession.

To contact the reporter on this story: Finbarr Flynn in Tokyo at fflynn3@bloomberg.net

Last Updated: November 14, 2008 04:19 EST