Oct. 31 (Bloomberg) -- Mizuho Financial Group Inc., Japan's second-biggest bank by revenue, cut its full-year profit forecast by 55 percent because of losses on investments and rising bad- loan costs.

The Tokyo-based bank, which reported net income of 311.2 billion yen ($3.2 billion) in fiscal 2007, expects profit of 250 billion yen for the year ending March 31, it said in a statement today. That's down from a May forecast of 560 billion yen.

Mizuho joined smaller rival Sumitomo Mitsui Financial Group Inc. in reducing profit estimates as financial markets tumble and Japan's economy deteriorates, driving loan defaults higher. The Bank of Japan today cut its benchmark interest rate for the first time in seven years to limit economic damage from the global financial crisis.

``We can expect only worsening results across the industry,'' said Kyong Sun Kong, an analyst at Celent, in a note to clients. ``The interim results don't yet reflect the deepening financial crisis of recent weeks, including likely substantial markdowns in securities held by banks.''

Mizuho closed 5.2 percent lower in Tokyo trading, after earlier rising as much as 6.6 percent. The stock has lost 57 percent this year, underperforming a 45 percent decline in the 84-company Topix Banks Index tracking Japanese lenders.

The bank posted net income of 94 billion yen for the first half ended Sept. 30, it said citing preliminary figures. Mizuho had forecast a 250 billion yen profit for the six-month period.

Securities Losses

Mizuho also reduced its full-year revenue forecast to 3.8 trillion yen from 4.3 trillion yen. The company had 4.5 trillion yen of revenue in its latest fiscal year.

``The dislocation in the global financial markets stemming from U.S. subprime loan issues expanded further after the announcement of the previous earnings estimates,'' Mizuho said in a statement today.

Mizuho booked 142 billion yen in losses on securities in the period, according to the statement. The bank recorded the largest subprime-related losses of any Asian bank last year at 645 billion yen.

Bad-loan costs are expected to total 130 billion yen in the first half at Mizuho's three main banking units because of an increase in domestic bankruptcies and losses linked to the collapse of Lehman Brothers Holdings Inc.

Slowing Lending

``The downward revision was within expectations, as it was inevitable that banks would be affected by the rising costs of bad loans,'' said Mitsushige Akino, who oversees about $468 million as chief fund manager at Tokyo-based Ichiyoshi Investment Management Co.

Sumitomo Mitsui said Oct. 29 its net income will drop 63 percent to 180 billion yen in the year through March, citing an expected doubling in credit costs, to 370 billion yen, at its main banking unit for the period.

Lending growth at Japanese banks slowed in September for the first time in nine months after companies' borrowing needs for raw materials fell, according to the Bank of Japan. Loans, excluding those by credit associations, rose 1.8 percent in September from a year earlier, after growing 2 percent in August, the central bank said.

To contact the reporters on this story: Finbarr Flynn in Tokyo at fflynn3@bloomberg.net; Tomoko Yamazaki in Tokyo at tyamazaki@bloomberg.net

Last Updated: October 31, 2008 02:24 EDT