Mitsubishi UFJ Financial Group <8306.T>, Japan's largest bank by assets, returned to profit in the latest quarter due to the absence of big losses on its stock portfolio but its growth forecast for this year is below market expectations.

Mitsubishi joined other Japanese banks in reporting higher quarterly profits as a pickup in the world's second-largest economy eases bad-loan costs and the stock market's recovery from last year's lows supports the lenders' massive share portfolios.

But analysts say Japanese banks may struggle to deliver strong earnings growth given their heavy reliance on the domestic market, where demand for loans remains weak and spreads are thin.

MUFG, which spent $9 billion for a 21 percent stake in Morgan Stanley at the height of the financial crisis, forecast net profit of 400 billion yen ($4.3 billion) in the year to next March, below the average estimate of 436.2 billion yen in a poll by Thomson Reuters I/B/E/S.

Mizuho Financial Group <8411.T> and Sumitomo Mitsui Financial Group <8316.T>, Japan's No.2 and 3 banks, projected higher profits last week, and Mizuho announced plans to sell about $8.6 billion in new shares.

For the quarter ended March 31, MUFG said its net profit totaled 171.7 billion yen, against a loss of 214.9 billion yen a year earlier. The quarterly result compared with the market consensus for a profit of 81.3 billion yen and against MUFG's own estimate in February of a 82.9 billion profit.

Analysts also say Japan banks' earnings improvement could prove fleeting if Japanese stocks dive further, hitting the value of their massive shareholdings, held mainly to cement ties with borrowers and business partners.

Shares of MUFG lost 24 percent in the 12 months to Tuesday, underperforming a 13 percent gain in the Nikkei average <.N225>.

On Tuesday, the stock finished down 0.9 percent before the announcement, underperforming the Nikkei's 0.1 percent rise. Jiji news agency reported during trading hours that MUFG would likely beat its forecast for 2009/10 by more than 20 percent, briefly pushing its shares into positive territory.

(Reporting by Taiga Uranaka; Editing by Muralikumar Anantharaman and Michael Watson)