Mizuho Financial Group's October-December profit shrunk to less than half the previous quarter on smaller bond trading gains, underscoring the bleak outlook for growth at Japanese banks due to slack loan demand.

After riding the upswing in bond markets to strong profit growth in the preceding two quarters, Mizuho's earnings slumped in the absence of those gains, and it stuck by its forecast for the full year to March that falls short of market expectations.

We are not likely to see large growth this year and the next. We are not in an environment where a sharp increase in interest margin and loan balance can be expected, Chikako Horiuchi, analyst at Fitch Ratings in Tokyo.

They have few choices but to look to overseas for growth driver, she said.

Net profit of Mizuho, Japan's second-largest bank, doubled to 80.3 billion yen ($978.1 million) in the third quarter from a year earlier, according to Reuters' calculations from nine-month results, thanks to smaller credit costs on strength of fewer bankruptcies among borrowers.

That compared with forecasts of 100 billion yen by Citigroup Global Markets and 87 billion yen by Credit Suisse.

Mizuho's year-on-year comparison was also boosted by bigger fee revenues as the bank sold more mutual funds and other financial products to retail customers.

But the latest quarter's net profit was less than half of that of the preceding quarter.

For the first six months of the current financial year, Mizuho and its rivals saw their earnings boosted by a sharp rise in prices of U.S. Treasury and Japanese government bonds, although bond prices showed a sharp reverse late last year.

For the year ending in March, the bank retained its net profit forecast of 500 billion yen, up from 239.4 billion yen a year earlier and in line with an average estimate of 507.3 billion yen in a poll of 14 analysts by Thomson Reuters I/B/E/S.

Last week, No. 3 Japanese bank Sumitomo Mitsui Financial Group posted a 21 percent fall in net profit on poor demand for loans and bond trading losses.

Shares of Mizuho lost 8 percent last year, underperforming a 3 percent fall in the benchmark Nikkei average. ($1=82.10 Yen) (Reporting by Taiga Uranaka; Editing by Muralikumar Anantharaman and Edmund Klamann)