* Q1 net down 6 pct at MUFG, 38 pct Mizuho, 20 pct SMFG
* Overseas expansion expenses bring down MUFG profit
* Mizuho, SMFG stock-related gains drop vs year prior (Recasts, adds profit breakdown, analyst comments, context)
TOKYO, July 31 (Reuters) - Mitsubishi UFJ Financial Group (MUFG) reported a far milder quarterly profit decline than its main banking rivals as aggressive overseas expansion dulled the impact of perennially weak loan demand at home.
MUFG on Thursday said net profit slid 5.8 percent in April-June. Mizuho Financial Group and Sumitomo Mitsui Financial Group Inc (SMFG), however, suffered double-digit percentage falls, primarily because the value of shares the banks own grew at a slower rate than a year earlier.
Japan's biggest lender by assets, which owns about one-fifth of U.S. bank Morgan Stanley, has been the more active of the three "megabanks" in overseas markets in recent years. That has helped it rely less on stock-related gains, which drove bank profits to record highs last year.
In the April-June quarter, MUFG was the only one of the three to increase revenue. MUFG attributed the gain to a rise in overseas lending and last year's $5 billion acquisition of Bank of Ayudhya PCL, Thailand's fifth biggest bank by assets.
Outstanding overseas loans at MUFG grew 25 percent on year to 33.9 trillion yen ($329.89 billion) as at the end of June, partly boosted by the loans on Ayudhya's books. Overseas loans totalled $159 billion and $175 billion at Mizuho and SMFG.
But expenses related to overseas expansion at MUFG - which aspires to be a top 10 bank in the United States - brought down net profit to 240.5 billion yen in April-June from 255.3 billion yen a year earlier.
At Mizuho and SMFG, the decline was much more acute. First-quarter profit fell 38 percent to 154.7 billion yen at Mizuho, and on Wednesday, SMFG said profit fell 20 percent to 230.8 billion.
"The year-earlier quarter was too good (for Mizuho and SMFG), including strong earnings at brokerage subsidiaries and big stock market-related gains," said Miki Murakami, director at Fitch Ratings in Tokyo.
All three banks booked record profit in the year ended March when economic growth pledges by Prime Minister Shinzo Abe sparked a surge in share prices, pushing up the value of stock holdings. But price moves have since moderated in tandem with sentiment towards "Abenomics".
Japan's benchmark Nikkei share index rose 2.3 percent in April-June, compared with 10 percent in the same period a year earlier.
Over the same time frame, stock-related gains fell 42 percent at both Mizuho and SMFG. At MUFG, gains rose to 17.9 billion yen from 12.8 billion yen a year earlier, when the bank wrote down the value of stocks where prices fell below certain thresholds recorded on its books.
Shares of MUFG itself closed 0.9 percent higher before the bank announced earnings on Thursday, versus a 0.2 percent decline in the benchmark index. Mizuho closed up 0.1 percent, and SMFG ended up 1.7 percent.
FALLING INTEREST MARGINS
Loan volumes at Japanese banks are starting to increase after years of stagnation, reflecting demand spurred by Abenomics. However the rate of growth has not been quick enough to cancel out a decline in interest margins, or the difference between interest charged on loans and paid on deposits.
One element of Abenomics involved the central bank buying Japanese government bonds (JGBs), a measure aimed at ending a decade of deflation. Buying JGBs increased the supply of money and so brought down the cost of borrowing, simulating loan demand. However, the measure also compelled banks to lower already-low interest rates.
At MUFG's core banking units, the interest margin was 1.11 percent in the first quarter, from 1.19 percent a year prior. Bank executives say margins are unlikely to rise while the Bank of Japan (BOJ) keeps buying JGBs.
Yields on JGBs have been low since the BOJ started purchases in April last year. In consequence, commercial banks' mortgage rates - which are influenced by JGB yields - have hovered near historic lows.
MUFG's August 10-year fixed-mortgage rate for most qualified borrowers is an all-time low of 1.3 percent, after being lowered from July's 1.35 percent.
Fitch's Murakami said that, in such an environment, "a sharp recovery in domestic lending business is unlikely in the near future." (1 US dollar = 102.7600 Japanese yen) (Editing by Christopher Cushing)