Oct. 31 (Bloomberg) -- Mitsubishi UFJ Financial Group Inc., Japan's biggest bank, cut its full-year profit forecast 66 percent, citing investment losses and rising bad-loan costs.

The Tokyo-based lender reduced its estimate for the 12 months ending March 31 to 220 billion yen ($2.3 billion) from a May forecast of 640 billion yen, according to a statement to the Tokyo Stock Exchange today. The company reported net income of 636.6 billion yen last year.

Mitsubishi UFJ joined smaller competitor Mizuho Financial Group Inc. in trimming profit forecasts as loan defaults rose in a worsening economy and tumbling financial markets reduced asset values. Liabilities at bankrupt companies almost tripled in the six months ended Sept. 30 from a year earlier, according to Teikoku Databank Ltd.

``These bankruptcies are not coming to an end, and second- half credit costs may not even come down,'' said Kristine Li, an analyst at KBC Securities in Tokyo.

Mitsubishi UFJ said credit costs for its two main banking units totaled 245 billion yen in the first half, citing ``deteriorating business conditions for the group's customers.'' The total was more than expected, the bank said, without giving further details. Losses on securities totaled 75 billion yen.

Net income in the fiscal first half fell to 100 billion yen from 256.7 billion yen a year earlier, the company said in a preliminary earnings statement today.

Morgan Stanley

After investing $9 billion in Morgan Stanley, Mitsubishi UFJ said Oct. 27 it plans to sell as much as 990 billion yen of stock to replenish its capital. In addition to the Morgan Stanley investment, the bank is taking control of a Californian affiliate, stretching its balance sheet.

The bank also cited declining fee income from the sale of investment trusts and falling trading income as reasons for the revision.

Mitsubishi UFJ slipped 5.4 percent to 598 yen today in Tokyo before the announcement. The stock has lost 43 percent this year and touched a five-year low of 490 yen on Oct. 28. Mizuho, also based in Tokyo, dropped 5.2 percent.

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

The fallout has started to take its toll on Japan's banks, which avoided most of the subprime-related writedowns that hobbled competitors in Europe and the U.S.

Sumitomo Mitsui Financial Group Inc., Japan's third-largest bank by revenue, on Oct. 29 slashed its full-year profit forecast by almost two-thirds to 180 billion yen, citing an expected doubling in credit costs to 370 billion yen at its main banking unit.

Resona Holdings Inc., Japan's fourth-biggest bank by market value, cut its full-year profit forecast today by 36 percent to 160 billion yen because of rising credit costs.

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

Last Updated: October 31, 2008 04:32 EDT