UPDATE 2-SMFG cuts earnings target 63 pct as market crisis bites
* Earnings outlook battered as economy slows
* SMFG to buy small stake in S.Korea's KB Financial
* Bad loans mount (Adds details, confirmation of stake purchase in KB Financial)
By David Dolan
TOKYO, Oct 29 (Reuters) - Sumitomo Mitsui Financial Group (8316.T: Cotización), Japan's No. 3 bank, slashed its full-year earnings target by 63 percent as a sputtering economy drives up its bad-loan costs and market turmoil erodes the value of its stock portfolio.
The bank, which earlier this year bought a 2 percent stake in Britian's Barclays (BARC.L: Cotización), also said it will take up to the same amount in South Korea's KB Financial (105560.KS: Cotización), in a deal estimated at 20 billion yen ($202 million).
Once thought to be relatively immune to the global credit crisis, Japanese lenders now face a sharp downturn in profits, largely due to their overexposure to the plunging domestic stock market.
They have also been waylaid by the brittle state of the world's no.2 economy, where a surge in bankruptcies has pushed bad loan costs sharply higher.
Sumitomo Mitsui is the first of Japan's top three "megabanks" to cut its forecasts for this business year. Analysts are expecting its two bigger rivals -- Mitsubishi UFJ and Mizuho Financial Group (8411.T: Cotización) -- to follow suit. Continuación...