UPDATE 3-Japan's Aozora slashes 07/08 profit outlook 80 pct

(Recasts, adds details)

By David Dolan and Edwina Gibbs

TOKYO, April 23 (Reuters) - Japan's Aozora Bank (8304.T) slashed its annual profit estimate by 80 percent on Wednesday to make provisions for its investment in GMAC, the subprime-wracked finance arm of General Motors Corp GM.N.

Aozora, which is nearly 46 percent-owned by U.S. fund Cerberus Capital Management [CBS.UL], also said its chairman, a veteran Japanese banker, would step down after just a year in his post.

Investors shrugged off the news, however, with shares closing up 1.3 percent after the announcement.

Although Japanese banks have largely dodged the subprime damage that tore through UBS AG (UBSN.VX) and Merrill Lynch & Co MER.N, Aozora was stung by its $500 million investment in GMAC LLC.

The midsize lender is part of a Cerberus-led group that in 2006 bought a 51 percent stake in GMAC, which then went on to lose about $2.3 billion due to a meltdown at its mortgage business.

Aozora said in a statement it would set aside 14.8 billion yen to help cover losses on the investment. The bank also said its subprime-related losses likely grew to 45.3 billion yen ($440 million), up from an an earlier estimate of 42 billion yen.

It said it now expects a group net profit of 5 billion yen ($49 million) for the year ended March 31, well below its earlier projection of 26.5 billion yen.

At the recurring level, which does not include taxes and exceptional items, Aozora said it would likely post a loss of 22 billion yen, compared with an earlier estimate of a 3 billion yen profit.

VALUATION LOSSES

The lender said it valued its collateralised debt obligations (CDOs) at 4.4 billion yen, or less than 10 percent of their original value.

"Having successfully rebuilt the bank's capital base, we have been able to absorb these valuation losses whilst remaining profitable," Federico Sacasa, Aozora's president and chief executive, said in a statement.

The bank has now cut its full-year estimates three times, having originally projected a net profit of 84.5 billion yen.

Aozora also said Chairman Kimikazu Noumi would leave the bank next month.

Noumi, who joined Aozora in 2006 and became chairman and chief executive in early 2007, was said to have clashed with Cerberus, according to domestic media reports.

Noumi was replaced as chief executive by Sacasa in February, just a month after the lender cut its forecast for the second time.

Cerberus, which recently raised its stake in Aozora to almost 46 percent from 38 percent, took the bank public in 2006 after buying its failed predecessor, Nippon Credit Bank.

Since then, its shares have fallen almost 40 percent, hurt by concerns about subprime exposure.

The shares finished up 1.3 percent at 302 yen on Wednesday, outperforming Tokyo's index of bank stocks .IBNKS.T, which was little changed. (Additional reporting by Taro Fuse; Editing by Chris Gallagher)