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TOKYO (Reuters) - Japan's top banks reported a sharp rise in profits for the quarter ended December, helped by a year-end stock market rally and strong growth in overseas loans while bad-loan costs remained low.
They were also buoyed by the yen's recent fall against the dollar as they aggressively expanded overseas amid weak growth prospects at home.
Mitsubishi UFJ Financial Group Inc's (8306.T) third-quarter net profit doubled after Japan's largest bank by assets saw the value of its massive equity portfolio boosted by a nearly 20 percent gain in the benchmark Nikkei average .N225 in the final three months of 2012, powered by investor expectations for an aggressive economic policy by Prime Minister Shinzo Abe.
MUFG, which holds a 22 percent stake in Morgan Stanley (MS.N), also sharply increased overseas loans during the quarter, leveraging its ample cash holdings as European rivals retreated in the wake of that region's debt crisis.
The bank's profits were also boosted by gains from Japanese government bond trading amid the country's ultra-low interest rates.
Japan's big three banks dominated the top positions of global project finance arrangers in 2012, with MUFG ranked No.1 and Sumitomo Mitsui Financial Group Inc (SMFG) (8316.T) ranked No.3 and Mizuho Financial Group Inc (8411.T) ranked No.4, Thomson Reuters data showed.
Domestic lending continued to be sluggish, with the three banks seeing their loan balances in Japan remaining almost flat or shrink. Loan-deposit ratios also fell, further sapping the profitability of domestic lending.
"Thanks to external factors including a stock market upswing, bank earnings were better than expected. But their core business activities' recovery is not as sharp," said Naoko Nemoto, managing director at Standard & Poor's Ratings in Tokyo. She also said the banks need to take advantage of an ongoing stock market rally to reduce their massive equity portfolios, which makes them highly vulnerable to market swings.
MUFG posted a net profit of 242 billion yen ($2.7 billion) for the October-December period, up from 119.7 billion yen a year earlier, according to Thomson Reuters' calculations from the bank's nine-month results released on Friday.
MUFG kept its full-year net profit forecast at 670 billion yen, below an average estimate of 685.6 billion yen in a poll of 17 analysts by Thomson Reuters.
SMFG and Mizuho announced their results earlier this week. SMFG, whose profit more than doubled in third quarter, was buoyed after the lender took full control of its once-listed consumer finance unit, whose profits are now 100 percent reflected in the bank's earnings.
Mizuho benefited heavily from the stock market upswing as well. The bank had suffered huge impairment losses on its equity holdings in preceding quarters.
The banks' bottom lines were also pushed up when they translated dollar-based earnings to yen. The yen lost more than 10 percent of its value against the dollar in the final three months of 2012. MUFG said a favorable currency trend pushed up its gross profit by about 40 billion yen in the nine-month period.
Shares of all three biggest banks rose more than 20 percent in the final three months of 2012, outperforming a 17 percent gain in the benchmark Nikkei average .N225.
($1 = 91.2600 Japanese yen)
Reporting by Taiga Uranaka; Editing by Matt Driskill