Mitsubishi UFJ Financial Group Inc, Japan's largest bank, posted a 49 percent drop in first-half profit on Wednesday, hit by subprime-related investments and hefty losses at its credit card unit.

The bank kept its recently lowered full-year forecast and said its exposure to products related to the deteriorating subprime loan market stood at 260 billion yen ($2.4 billion) as of the end of October, unchanged from September.

Although Japanese lenders have fewer investments in securities related to risky U.S. mortgages than overseas rivals, they have not escaped unscathed.

The credit crisis has forced them to write down the value of subprime-related holdings and other assets. Earnings at Japan's second- and third-largest banks, Mizuho Financial Group Inc and Sumitomo Mitsui Financial Group, have also been hit.

There is probably better value in other parts of the market that have suffered on the back of these subprime concerns, said Marc Desmidt, head of the portfolio management group at BlackRock Japan.

We need to have confidence that (Japan's banks) really understand the extent of their liabilities, that they've been transparent, and that they've made adequate provisions.

Ties to consumer lenders have also hurt MUFG and other banks, after tougher government regulation cut industry profits.

MUFG's credit card affiliate, Mitsubishi UFJ Nicos, has said it expects a net loss of 112 billion yen for the year to March, due in part to restructuring costs.

For the six months to Sept. 30, MUFG said group net profit fell to 256.7 billion yen ($2.34 billion), from 507.3 billion a year earlier.

The result was widely expected after the bank said last month it would fall short of both its first-half and full-year estimates, hurt by its subprime exposure and losses at the credit card unit.

MUFG last month cut its first-half estimate by 30 percent to 245 billion.

For the full year, the bank stuck to its recently lowered forecast for a net profit of 600 billion, or a 32 percent decline from the previous year.

That compares with a market consensus of 648.4 billion yen in a poll of six analysts by Reuters Estimates.

SUBPRIME LOSSES

MUFG said losses on subprime-related investments cost it 4 billion yen in the first half, less than the 5 billion yen it estimated last month.

MUFG President Nobuo Kuroyanagi said he did not expect the losses to increase dramatically.

I don't expect that we will see big subprime-related losses in the second half, Kuroyanagi told a news conference.

Even as MUFG said its overall subprime exposure remained stable at 260 billion yen, it was forced to further write down the value of subprime-related investments in the month of October.

The bank's write-down amounted to 23 billion yen by the end of last month, an increase of 3 billion yen from September.

Like most of its rivals, MUFG's core lending business remained sluggish in the first half.

Net interest income, an gauge of earnings from lending, increased just 2.2 percent in the first half, as it was partially offset by a narrowing of the loan spread.

The Bank of Japan began raising interest rates from zero more than a year ago, but tough competition to lend and healthier company balance sheets have made it difficult for commercial banks to pass on rate hikers to borrowers.

The bank also said that it would raise its stake in terms of voting rights in Mitsubishi UFJ Lease & Finance Co to about 26 percent from 18.6 percent on a consolidated basis by buying shares from closely related parties.

MUFG is the last of Japan's top three mega banks to report its first-half earnings.

Sumitomo Mitsui Financial Group reported on Monday a 30 percent drop in net profit, while Mizuho Financial Group last week posted a 17 percent decline and cut its full-year outlook.

Prior to the announcement, shares in MUFG fell 1.6 percent to 920 yen. The stock has lost about 37 percent so far this year, underperforming a 31 percent drop in Tokyo's index of bank stocks. (Additional reporting by Taro Fuse; Editing by Louise Heavens and David Cowell)

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