UPDATE 2-Japan's SMFG reports drop in H1 profit as retail banking business stagnates

* H1 net profit Y432 bln vs Y472.6 bln a year earlier

* Keeps full-year net profit forecast at Y700 bln (Adds retail and market division’s performance, CEO comment)

TOKYO, Nov 13 (Reuters) - Sumitomo Mitsui Financial Group Inc (SMFG), Japan’s second-largest lender by assets, reported on Wednesday an 8.6% drop in first-half net profit, saying its retail business struggled under sluggish market conditions.

Japanese banks have been struggling for profit under aggressive monetary easing policy that has seen the central bank guide short-term rates toward -0.1% and the 10-year government bond yield to around 0%.

Net profit came in at 432 billion yen ($4 billion) in April-September compared to 472.6 billion yen a year earlier, SMFG said in a stock exchange filing.

For the full year through March, SMFG reiterated its forecast for a profit of 700 billion yen. That compares with the 718.9 billion yen average of 12 analyst estimates compiled by Refinitiv.

SMFG’s market division posted 227.9 billion yen of net business profit, up 20.4% from a year earlier, mainly from the sale of foreign bonds which the bank had bought before interest rates started to decline.

But its retail business remained weak. The division’s net business profit came in at 111.2 billion yen, down 8.9% from a year earlier.

“If the negative interest rate will be lowered by 10 basis points, our top line will be affected by 30 billion yen,” chief executive Jun Ohta said at an earnings briefing.

As its traditional lending business remained weak, SMFG’s banking unit reported net interest income of 441.2 billion yen for the half year, down 9.2% from a year earlier.

With ultra-low rates at home, SMFG has tried to find seeds of growth in overseas markets. The bank and Singapore lender OCBC Group Holdings are vying to buy Indonesia’s PT Bank Permata, Reuters has reported.

SMFG has long been the leanest among Japan’s three megabanks in terms of expenses as a proportion of revenue. It said its expense ratio was 62.1% in the second quarter, up from 58.4% a year earlier. ($1 = 109.1000 yen) (Reporting by Takashi Umekawa; Editing by Susan Fenton and Kirsten Donovan)