June 8 (Bloomberg) -- Sumitomo Mitsui Financial Group Inc., Japan’s second-biggest bank by market value, said bad loans are within company estimates so far for the fiscal year started April 1.

“Bad loans are within our expectations thus far this year, though you never know when they’re going to shoot up,” Masayuki Oku, chairman of the Tokyo-based lender, said in an interview on the sidelines of a conference in Kyoto, Japan.

Japan’s worst postwar recession has caused a surge in bad debt, contributing to a 373.5 billion yen ($3.8 billion) loss at Sumitomo Mitsui for the 12 months ended March 31, the company’s biggest shortfall in six years. While the nation’s economy probably hasn’t bottomed out yet, it may be “close,” Oku said.

Preliminary figures showed the economy contracted a record annualized 15.2 percent in the three months ended March as exports collapsed. The economy may be headed for a recovery as production cuts ease, Bank of Japan board member Hidetoshi Kamezaki said on June 3.

Sumitomo Mitsui has forecast a 220 billion yen profit for the current fiscal year. The company estimates bad-loan charges at its main banking unit will drop to 380 billion yen from 550 billion yen last year.

The bank’s acquisition of Citigroup Inc.’s Japanese securities units should contribute to profit in the second half of this year after the deal closes in October, Oku said today. Sumitomo Mitsui said May 1 it agreed to buy the Nikko Cordial Securities Inc. brokerage and the underwriting divisions of Nikko Citigroup Ltd. from New York-based Citigroup for 545 billion yen.

The Japanese lender has no plans at present to acquire bank assets overseas, Oku said.

To contact the reporters on this story: Finbarr Flynn in Tokyo at fflynn3@bloomberg.net; Masatsugu Horie in Osaka at mhorie3@bloomberg.net

Last Updated: June 8, 2009 03:00 EDT