Jan. 28 (Bloomberg) -- Sumitomo Mitsui Financial Group Inc., Japan’s third-biggest bank, said profit fell more than 99 percent in the third quarter as it took losses on stockholdings and bad loans rose.

Net income for the three months ended Dec. 31 plunged to 154 million yen ($1.7 million) from 148.9 billion yen a year earlier. Bloomberg News calculated earnings by subtracting first-half results from nine-month figures announced today.

Sumitomo Mitsui needs to make almost 100 billion yen in the fourth quarter to meet its full-year profit forecast, even as Japan’s worsening recession threatens to drive more companies into bankruptcy and further erode the value of the lender’s shareholdings. The Bank of Japan said last week the economy may shrink a record 2 percent in the year beginning April 1.

“I am amazed that they have held their forecast,” said Scott McGlashan, a London-based fund manager who oversees Japanese stocks at J.O. Hambro Capital Management Ltd. “The penalty for being very conservative would not be great, so why not forecast low?”

Tokyo-based Sumitomo Mitsui maintained its 180 billion yen profit target for the year through March 31.

Losses on shareholdings surged to 86.3 billion yen for the quarter from a deficit of 6.4 billion yen a year earlier, according to a Bloomberg News calculation, as the Nikkei 225 Stock Average slumped 21 percent in the three months. Costs related to bad debts rose 2.4 percent to 97.3 billion yen.

Mitsubishi UFJ Financial Group Inc., Japan’s biggest bank, said Jan. 15 it will book 288 billion yen in costs for losses on stock-market investments.

‘Bankruptcies Are Up’

Sumitomo Mitsui rose 1.2 percent to 3,360 yen as of the 3 p.m. local close of trading in Tokyo before the announcement. The stock has slumped 58 percent during the past year, compared with a 43 percent decline in the 84-company Topix Banks Index.

“With the crash in the stock prices, banks are going to have very big impairment losses,” said Edwin Merner, president in Tokyo of Atlantis Investment Research Corp., which manages about $3.1 billion. “As bankruptcies are up, there’s also going to be more write-offs ahead.”

The lender, which invested 500 million pounds ($710 million) in July in London-based Barclays Plc, is considering setting up a joint venture in Japan with the U.K. lender to provide private banking. Barclays has declined about 70 percent in London trading since Sumitomo Mitsui purchased the stake.

Subprime Loss

Lending by Japan’s banks accelerated at the fastest pace in 16 years in December as the global credit crisis shut off other avenues for companies in need of funds. The increase favors large banks, according to Graeme Knowd, a Tokyo-based analyst at Morgan Stanley, as the lenders are boosting loans mainly to Japan’s biggest firms, where the risk of bad loans is smaller.

The shrinking global economy and strengthening yen have caused a record decline in Japanese exports, which plunged 35 percent in December from a year earlier. Japan’s corporate bankruptcies climbed 11 percent from a year earlier, the fastest pace since 2000, to 15,646 cases in 2008, Tokyo Shoko Research Ltd. said Jan. 13.

Loans at the bank rose 4.5 percent to 61.2 trillion yen at the end of December, from 58.5 trillion yen in the second quarter. The bank said it lost 3 billion yen on subprime-related securities in the nine months ended Dec. 31.

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

Last Updated: January 28, 2009 04:15 EST