July 31 (Bloomberg) -- Mitsubishi UFJ Financial Group Inc., the world's biggest bank by assets, said first-quarter profit fell 16 percent after taxes more than doubled and it posted losses from bond trading.

Net income declined to 219.5 billion yen ($1.9 billion) in the three months ended June 30, from 260.4 billion yen a year earlier, Tokyo-based Mitsubishi UFJ said in a statement today. The bank maintained its full-year forecast of 750 billion yen.

The higher tax bill and bond losses outweighed an increase in fees and lending income in an economy expanding at its fastest pace in 15 years. The Bank of Japan this month raised its key interest rate for the first time since 2000, increasing the potential for bond losses at lenders as yields rise.

``Tax costs differ from one bank to another depending on how they treated deferred taxes in past years,'' said Yasunobu Doi, a senior credit officer at Moody's Investors Service in Tokyo. ``The focus now should be on how banks are developing new revenue sources.''

Mitsubishi UFJ posted a loss of 24.8 billion yen from bond trading in the quarter, compared with a gain of 69.5 billion yen a year earlier. The bank held about 26.5 trillion yen of Japanese bonds as of June 30.

Comparative figures were calculated by combining earnings reported by the former Mitsubishi Tokyo Financial Group Inc. and UFJ Holdings Inc., which it acquired last October. The jump in taxes in the quarter was related to payments UFJ deferred because it had been unprofitable for four years.

Recovering Economy

Japan's biggest banks have benefited from accelerating growth and a stock-market rally in the world's second-biggest economy that followed three recessions. Increased revenue enabled them to repay public money received in the late 1990s and reduce bad loans.

Net interest income, a measure of lending profitability, at Mitsubishi UFJ rose to 470.7 billion yen in the quarter from 409.2 billion yen a year earlier. Net fee income climbed to 260.9 billion yen from 210.2 billion yen.

Tax payments, current and deferred, surged to 141.7 billion yen from 66.6 billion yen a year earlier, the bank said. Bad-loan costs in the quarter were 11.7 billion yen, compared with a gain of 29.8 billion yen a year earlier.

The lender's full-year forecast is 37 percent lower than its net income in the year ended March 2005 when earnings were inflated by revenue that had previously been set aside to cover bad loans.

Interest Rates

The Bank of Japan on July 14 lifted its key overnight interest rate to 0.25 percent from almost zero after policy makers concluded that deflation was almost beaten.

The move was ``within expectations,'' Mitsubishi UFJ President Nobuo Kuroyanagi, 64, said earlier this month. Most banks had already anticipated this increase in their profit forecasts, he said.

On the same day the central bank raised the key rate, Mitsubishi UFJ said its main banking unit would increase rates on short-term ordinary deposits to 0.1 percent from a previous 0.001 percent starting July 18. Its rivals, including Mizuho Financial Group Inc. and Shinsei Bank Ltd., announced similar steps.

Shares of Mitsubishi UFJ dropped 2.5 percent this year, after surging 54 percent in 2005. Japan's stock-market rally has stalled following the biggest gains in 30 years in the second half of last year.

To contact the reporter on this story: Mariko Yasu in Tokyo at myasu@bloomberg.net

Last Updated: July 31, 2006 05:22 EDT