* What: Big Japanese banks' third-quarter (Oct-Dec) results
* When: Sumitomo Mitsui Jan 28, Mizuho Jan 30, Mitsubishi UFJ Feb 6
* Mitsubishi UFJ and Mizuho may post net losses, Sumitomo Mitsui may see 97 percent profit decline
By David Dolan
TOKYO, Jan 27 (Reuters) - Japan's big banks are likely to post a sharp drop in quarterly earnings, with Mitsubishi UFJ Financial Group (8306.T) and Mizuho Financial Group (8411.T) tumbling into the red, hurt by losses on their stock holdings and a sputtering economy.
Although Tokyo's largest lenders have so far avoided the massive credit losses that toppled Lehman Brothers and threaten Citigroup (C.N), the Japanese banking tradition of taking shares in corporate clients has become their Achilles' heel.
Because of those stock portfolios, banks are unlikely to cut their full-year earnings estimates further in the coming week, as they wait to see how the market performs in the last quarter of their financial year.
"Don't focus on earnings. No matter what they are, they are going to be bad," said Ismael Pili, banking analyst at Macquarie Capital Securities in Tokyo.
"You focus on any incremental operational improvement ... we're potentially seeing better domestic loan volume and expansion in spreads."
Lending growth has been one of the few bright spots for the country's banks, as companies unable to raise funds in frozen credit markets instead turn to banks.
Loans issued by Japanese banks rose 3.7 percent in December from a year earlier, the largest increase since the Bank of Japan began publishing such data in 2000. [JPBNK=ECI]
But even rising loan volume is not a guaranteed positive.
Sumitomo Mitsui Financial Group (8316.T) is now facing higher bad-loan costs from its overseas lending, which had been growing steadily, the president of Japan's No.3 bank told Reuters this month. [ID:nT50454]
At home, banks were also likely hit by the continuing rise in bankruptcies, which trigger higher bad-loan costs.
Thirty-three listed firms went under in 2008, a post-war record, according to data from research firm Tokyo Shoko Research. About half of those were property firms, hit by a collapse in the real-estate market. [ID:nTKF003256]
Economists in Reuters latest monthly poll forecast that the world's second-largest economy is not likely to recover until the latter half of 2009 after marking five successive quarters of declines, which would be the longest period of contraction in its history. [ECILT/JP]
Mitsubishi UFJ, Japan's largest bank, may post the first quarterly loss in the group's nearly four-year history.
The bank is likely to book a group net loss of 87.8 billion yen ($985 million) for the October-December quarter, according to Hironari Nozaki, bank analyst at Nikko Citigroup. That compares to a profit of 57.9 billion a year earlier.
Mitsubishi UFJ, which last year paid $9 billion for a 21 percent stake in Morgan Stanley (MS.N), said this month it lost at least 288 billion yen on its securities portfolio in the third quarter. [ID:nT235606]
Japan's benchmark Nikkei share average .N225 tumbled 21 percent in the last three months of 2008, as it booked the biggest annual drop in its 58-year history.
Mizuho, Japan's second-largest bank, is likely to book a group net loss of 60 billion yen, reckons Nikko Citigroup's Nozaki, one of the few analysts to publish third-quarter estimates.
That compares to the 66 billion yen the bank reported a year earlier and would mark its second straight quarterly loss.
Sumitomo Mitsui is likely to be the only one of the top three banks to squeak out a net profit. The bank is likely to post a group net profit of 5 billion yen, Nozaki estimates.
That represents a 97 percent decline from the 148.9 billion it delivered a year earlier.
However, even with those bleak earnings, banks are unlikely to cut their full-year forecasts, as they wait out the stock market, Nozaki said in a note to clients this month,
Mitsubishi UFJ has forecast a full-year net profit of 220 billion yen. Mizuho expects its profit to total 250 billion yen and Sumitomo Mitsui expects 180 billion yen.
The three lenders all slashed their full-year forecasts by more than half in late October as the global financial crisis and fears of recession battered equity markets.