UPDATE 2-Cathay Fin Q2 net profit slumps on stock losses

* Books worse-than-expected T$586 mln Q2 profit

* Hit by stock-related losses

* Analysts may cut Cathay's FY profit outlook

* Banking shares have surged in recent months on China hopes

(Adds Cathay's comments in fourth graph)

TAIPEI, July 10 (Reuters) - Cathay Financial (2882.TW), Taiwan's top listed financial holding firm, on Friday posted a much worse than expected second-quarter net profit, hit by stock-related losses in May and June.

Cathay Financial, parent of Taiwan's biggest life insurer, recorded a net profit of T$5.6 billion ($17.8 million) for the first half of this year, and Reuters calculations indicated a second quarter net profit of T$586 million.

The market was expecting a second-quarter net profit of T$4.334 billion, a Reuters Estimates survey of two analysts showed. The result compares with a net loss of T$3.8 billion in the same quarter a year earlier and a T$4.98 billion net profit in the first quarter of this year.

Cathay General Manager Chen Tsu-pei told Reuters over the telephone that the financial firm had suffered losses in May and June due to stocks-related investments and added that he was uncertain if such losses would continue in July.

"The figure is actually much worse than expected," said an analyst who declined to be identified as he was not authorised to speak to the media. "We'll have to look at Cathay's numbers really closely, and might have to cut our earnings forecast for this year."

Cathay Financial and its Taiwanese rivals have seen their fortunes improve in recent months, with the global economy showing signs of stabilising and as investors bet that warming ties with China will be good for business.

Expectations of an agreement that would open up the financial services sectors of both sides has boosted banking shares at home, with the banking and insurance sub-index .TFNI having surged almost 50 percent since April, compared with a 30 percent advance on the main board .

In May, Cathay Financial said it planned to invest T$100 billion in China stocks and properties when the island permitted such investments. [ID:nTP207842]

Fubon Financial (2881.TW), parent of Taiwan's No.2 insurance company, said this month it would welcome Chinese investors to take up to a 20 percent stake in itself. [ID:nTPU001413]

Most forms of investments in China are closed to Taiwan's financial institutions, but cross-strait ties have eased significantly under the one-year-old administration led by President Ma Ying-jeou.

Cathay made the announcement after the market closed. Its shares ended 0.78 percent lower, while the main TAIEX index was up 0.32 percent. (US$ = T$33.0) (Reporting by Alice Chen and Rachel Lee; Writing by Kelvin Soh; Editing by Chris Lewis and Simon Jessop)