UPDATE 2-Japan's SMFG sees bumper year after brushing off Q3 profit fall
* Apr-Dec net profit Y704.7 bln vs Y550.4 bln year earlier
* Oct-Dec net profit Y199 bln vs Y219.4 bln year earlier
* Keeps FY view at Y750 bln vs Y792.2 bln analyst estimate (Adds analyst comment and overseas business)
TOKYO, Jan 29 (Reuters) - Sumitomo Mitsui Financial Group Inc is on track to end a bumper year as a sustained market rally lifts the bank's stock portfolio, letting it brush off a 9.3 percent profit fall in a third quarter absent of hefty bond-trading gains.
Japan's third-largest lender by assets together with rivals Mitsubishi UFJ Financial Group Inc and Mizuho Financial Group Inc are widely expected to report their best year in terms of combined profit since the financial year ended March 2006.
Japanese banks own an array of client companies' stocks which have shot up in value since the government began policies to end over a decade of deflation. The benchmark Nikkei stock index has risen 47 percent since the government assumed office at the end of 2012.
Rising stocks helped SMFG, whose portfolio includes Toyota Motor Corp and Canon Inc, report net profit on Wednesday of 704.7 billion yen ($6.9 billion) for April-December, from 550.4 billion yen a year earlier.
The bank's bottom line was also buoyed by the release of bad loan reserves as better economic conditions helped improve borrowers risk profiles.
Shares of SMFG closed up 2.7 percent ahead of the earnings release, in line with the benchmark stock index.
"The results show SMFG's solid earnings trend continues," said Miki Murakami, director at Fitch Ratings Japan. "Barring unexpected market moves, there is a possibility the company will beat its own full-year forecast."
For October-December, net profit was 199 billion yen from 219.4 billion yen a year prior, showed Reuters calculations based on nine-month figures.
The third quarter lacked the gains of a year earlier made by trading Japanese government bonds (JGBs). SMFG, like its rivals, has significantly reduced the amounts of JGBs it holds at any one time because a central bank JGB-buying policy has made prices volatile, making JGBs less attractive for commercial banks.
SMFG's banking unit held 9.2 trillion yen worth of JGBs at the end of December, from 20.7 trillion yen at the end of March.
The central bank early last year started buying JGBs to lower long-term interest rates and spur investment, to compliment the government's economic growth policies.
The policies have not translated into a significant increase in profit earned via lending. This is in part because demand for loans has not been enough to make up for narrowing profit margins as rivals compete by offering rock-bottom interest rates.
SMFG said the domestic outstanding loan balance at its banking unit stood at 48.5 trillion yen at the end of December from 46.5 trillion yen a year earlier. The average interest rate charged on domestic loans fell to 1.39 percent in the third quarter from 1.43 percent in the previous three months.
"The domestic lending spread is likely to remain low for a while," said Fitch's Murakami, referring to the difference between interest rates banks charge for loans and pay for deposits.
Weak prospects in the lending business has prompted SMFG and its rivals to accelerate expansion abroad.
Outstanding overseas loans at SMFG's banking unit totalled $158 billion as at the end of December from $146 billion a year earlier.
Also in December, SMFG agreed to buy the U.S. railcar leasing business of Perella Weinberg Partners LP for a sum estimated by a person familiar with the matter to be 30 billion to 50 billion yen.
The bank, whose assets total $1.45 trillion, did not change its full-year net profit forecast of 750 billion yen even though it has already earned more than 90 percent of that goal.
SMFG's forecast is 5.5 percent less than the year prior, and lower than the 792.2 billion yen mean estimate of 19 analysts polled by Thomson Reuters.
Japanese banks typically revise forecasts in the fourth quarter after making additional provisions for bad loans.
Mizuho and MUFG report earnings on Friday and Monday respectively. ($1 = 102.7900 Japanese yen) (Reporting by Taiga Uranaka; Editing by Christopher Cushing)