Oct. 22 (Bloomberg) -- Mitsubishi UFJ Financial Group Inc., the Japanese bank investing $9 billion in Morgan Stanley, will report lower-than-forecast profit as bad-loan costs rise and the value of its shareholdings declines, Nikkei English News reported.

Mitsubishi UFJ had net income of about 100 billion yen ($995 million) for the six months ended Sept. 30, compared with an earlier projection for a 5 percent gain to 270 billion yen, the news service said, without citing anyone. Takashi Takeuchi, a spokesman for the Tokyo-based bank, declined to comment on the accuracy of the report, saying ``nothing has been decided.''

Profit is set to fall at Japanese banks after debt from bankruptcies almost tripled in the first half and the global credit crisis pushed the nation toward a recession. Declining earnings at Mitsubishi UFJ, Japan's biggest bank, contrast with losses at overseas rivals, allowing the company to capitalize on turmoil in global markets by taking a stake in Morgan Stanley and making California's UnionBanCal Corp. a wholly owned subsidiary.

Mitsubishi UFJ, which has forecast a 640 billion yen profit for the full year ending March 31, increased writedowns of shareholdings and cleanup costs for bad loans during the first half, Nikkei said.

The bank will watch the current debate in Japan on revising mark-to-market accounting rules for investment holdings before any cut to its full-year projection, the report said.

Shinsei Bank Ltd., forecasting an 80 percent drop in annual profit as asset values slump, last week called for an immediate suspension of mark-to-market accounting rules that are forcing companies to book losses on illiquid holdings.

Mark-to-Market

``As an emergency rescue measure, mark-to-market rules should be halted,'' Masamoto Yashiro, chairman of the Tokyo-based bank, said in an interview on Oct. 17. ``If we don't have to mark to market, it will be a great help.''

Finance Minister Shoichi Nakagawa said Oct. 17 that Japan should change mark-to-market accounting regulations if current rules are found to cause ``systemic risk.'' The Securities and Exchange Commission is reviewing mark-to-market rules in the U.S., and European Union leaders have endorsed easing requirements.

Mitsubishi UFJ is also expected to pay an annual dividend of 14 yen a share, Nikkei said.

The Japanese government reiterated this month the country has probably slipped into a recession. The economy shrank an annualized 3 percent in the second quarter and reports since then suggest conditions have worsened.

Factory production fell in August at the fastest pace in five years, the unemployment rate rose to a two-year high, and orders for machinery fell for third month, the worst losing streak since the last recession in 2001.

Rising Bankruptcies

Sumitomo Trust & Banking Co., Japan's fifth-largest bank by market value, said on Oct. 10 it expects full-year profit to fall 21 percent to 65 billion yen as losses on overseas investments mounted and debt extended to bankrupt Lehman Brothers Holdings Inc. damped earnings.

The number of companies filing for bankruptcy increased 15 percent to 6,343 in the six months ended Sept. 30, according to data released research company by Teikoku Databank Ltd. Liabilities at bankrupt companies rose to 8.45 trillion yen from 2.88 billion yen for the same period a year earlier.

Lehman's main units in Japan filed for bankruptcy with about 4.7 trillion yen in debts, the nation's largest bankruptcy since World War II.

Lending growth at Japanese banks slowed in September for the first time in nine months after companies' borrowing needs for raw materials fell as prices dropped, 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.

Mitsubishi UFJ will receive $7.8 billion of preferred shares of Morgan Stanley and $1.2 billion is in non-convertible preferred stock. Both classes pay a 10 percent dividend, giving the Japanese bank $900 million in interest payments, or about 16 percent of Morgan Stanley's adjusted net income next year, based on the average of nine analysts' estimates.

To contact the reporters on this story: Joi Preciphs in Washington at jpreciphs1@bloomberg.net; Takahiko Hyuga in Tokyo at thyuga@bloomberg.net

Last Updated: October 21, 2008 19:59 EDT