Oct. 29 (Bloomberg) -- Sumitomo Mitsui Financial Group Inc., Japan's third-biggest bank by revenue, reported a 50 percent slump in first-half profit and cut its full-year forecast as bad debt costs rose.

Net income fell to 85 billion yen ($880 million) in the six months ended Sept. 30, from 170.6 billion yen a year earlier, according to a preliminary earnings statement filed with the Tokyo Stock Exchange today. Annual profit will drop to 180 billion yen, down from a May forecast of 480 billion yen, it said.

Sumitomo Mitsui, which extends a greater share of its loans to small companies than its bigger rivals, is reporting lower profit as bad debt costs surge after the collapse of Lehman Brothers Holdings Inc. and its local units, and as bankruptcies rise in Japan. Declining earnings at Japanese banks contrast with losses at global rivals, allowing Sumitomo Mitsui to capitalize on turmoil in global markets by investing 500 million pounds ($800 million) in Barclays Plc in July.

The bank, which reported full-year net income of 461.5 billion yen last year, said bad loan costs rose by 130 billion yen in the first half to 220 billion yen.

To contact the reporter on this story: Takahiko Hyuga in Tokyo at thyuga@bloomberg.net

Last Updated: October 29, 2008 03:25 EDT