May 20 (Bloomberg) -- Mitsubishi UFJ Financial Group Inc., Japan's largest bank by market value, posted an unexpected gain in fourth-quarter profit as reserves for bad loans declined and trading income rose.

Net income rose 69 percent to 322 billion yen ($3.1 billion) in the three months ended March 31, based on subtracting nine- month results from full-year figures announced in a statement to the Tokyo Stock Exchange today.

Full-year profit exceeded the company's own forecast of 600 billion yen, making Mitsubishi UFJ the only one among Japan's three largest banks not to miss earnings targets. Mitsubishi UFJ forecast profit in the year ending March 2009 will be little changed, suggesting it expects weakening economic growth in Japan to hamper lending expansion.

``I wouldn't say it's going to be a great year for the banks,'' said Masafumi Oshiden, a Tokyo-based fund manager at BlackRock Inc., which manages more than $1.1 trillion in assets. ``Mitsubishi UFJ is relatively well-positioned, because their balance sheet is the soundest and they have the most room to invest.''

The Tokyo-based bank said it booked 313 billion yen in valuation losses on investments in securitized products, leaving it with a balance of 3.32 trillion yen in such investments. It didn't book the shortfall in its income statement.

Subprime Losses

Mitsubishi UFJ recorded 66 billion yen in subprime-linked losses against profit in the fourth quarter, bringing the total for the year to 123 billion yen.

``We can't be positive on the result,'' said Nana Otsuki, an analyst at UBS AG in Tokyo with a ``neutral'' rating on Mitsubishi UFJ's stock. ``The valuation loss in securitization products was bigger than we expected.''

The company may have 50 billion yen in losses from its credit investments this year, President Nobuo Kuroyanagi told reporters in Tokyo today.

Mitsubishi UFJ fell 2.7 percent to close at 1,055 yen in Tokyo before the earnings announcement. The bank has climbed 34 percent since touching a four-year low of 789 yen on March 17, outperforming the 31 percent gain by the 85-stock Topix Banks Index during the same period.

For the full year ended March 31, net income declined 28 percent to 636.6 billion yen, compared with a 600 billion yen forecast made Oct. 31, the bank said in today's statement.

Bad-Loan Provisions

The company reduced bad-loan provisions by 32.8 billion yen in the fourth quarter, compared with 193.6 billion yen in bad- loan costs a year earlier, based on Bloomberg calculations.

Net interest income, the difference between what the bank makes from lending and what it pays on deposits, fell 13 percent to 456.2 billion yen during the three-month period, while fees and commissions declined by the same percentage to 277.5 billion yen. Net trading income rose 1.4 percent to 108.6 billion yen.

Sumitomo Mitsui, Japan's second-largest bank by market value, and Mizuho, the third-biggest, also recorded declines in interest income and fees and commissions as the global economy cooled and domestic shares fell, crimping demand for borrowing and the appetite for fund investments. The Nikkei 225 Stock Average fell 18 percent in the three months ended March 31.

Profit at Japan's five largest banks including Mitsubishi UFJ slid 34 percent to 1.79 trillion yen, according to Bloomberg data, as they booked additional subprime losses and income from lending and the sale of investments dropped.

``Japan's economic growth is slowing,'' the Bank of Japan said in a report today after keeping the benchmark lending rate at 0.5 percent, the lowest level among major economies.

The world's second-largest economy will grow 1.5 percent in the year ending March 31, less than an October estimate of 2.1 percent, the central bank said in a semi-annual outlook last month, omitting a reference to raising interest rates for the first time in two years.

``It's hard to see where earnings growth is going to come from this year,'' said David Threadgold, a bank analyst at Fox- Pitt Kelton Asia Ltd. in Tokyo.

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

Last Updated: May 20, 2008 06:27 EDT