* Banks benefit from report of bumper earnings * iPhone fills out KDDI forecast * HSBC cuts Japan rating, but BNP sees 13,000 for index By Sophie Knight TOKYO, Jan 29 (Reuters) - Japan's Nikkei share average rose on Tuesday morning, buoyed by optimism over earnings of major banks after initially opening lower on profit-taking. The index briefly pierced a 32-month high of 11,000 on Monday. Sumitomo Mitsui Financial Group (SMFG) rose 5.2 percent, while Mizuho Financial Group and Mitsubishi UFJ Financial Group (MUFG) added 2.9 and 4.4 percent, respectively, with all three in the top-four most traded stocks on the mainboard by turnover at mid-morning. The Nikkei newspaper said the recent stock market rally would boost the banks' shareholdings and net profit for the current financial year. A positive outlook for mobile carrier KDDI Corp, which lifted its full-year forecast by 1 percent to 505 billion yen ($5.57 billion) as contracts for smartphones have increased faster than expected, propped the stock up 3.6 percent. By mid-morning, the Nikkei was up 0.8 percent at 10,905.21. "I think earnings are going to be pretty weak, but most companies are going to get ignored as most people are looking forward to improvements in the yen," said a hedge fund manager who declined to be named. The yen has slid around 10 percent over the past two months, signalling improved profits for exporters whose overseas revenues will increase once repatriated. It firmed against the dollar on Monday to 90.5 versus the greenback. "There are going to be some bombs, and that will be greeted negatively, but there's a decent amount of names people are waiting to buy once the bad news clears out, so I think it will be better for the markets," the hedge fund manager added. Maeda Corp tumbled as much as 13.4 percent to a 10-week low after the contractor forecast an operating loss of 7 billion yen, down from a previous estimate of 5.2 billion yen profit, citing deteriorating profit margins. "The two factors to watch now are whether foreign investors, who drove the recent rally, remain bullish and continue buying, and whether retail investors continue to buy into emerging stocks that are relatively immune to the exchange rate," said Yoshihiro Ito, chief strategist at Okasan Online Securities. Foreign banks have mixed outlooks on Japan. While BNP Paribas has raised its target for the Nikkei to 13,000, 19.8 percent higher than its current level, HSBC shifted Japan back to "underweight" its global stocks portfolio after raising it to neutral in December. "We feel the excitement over "Abenomics" is now priced in, and the Bank of Japan has yet again shown it will do nothing dramatic to end deflation, said Garry Evans, global head of equity strategy at HSBC, in a note on Monday. The BOJ announced a 2 percent inflation target at its last policy meeting on Jan. 22 and committed to buying open-ended assets, but only from 2014, which disappointed some investors that were hoping for more immediate action. Societe General, however, pointed to the heat around emerging stocks, which market watchers say retail investors have been piling into, partly because of credit deregulation starting in January that enabled them to use the same collateral for multiple margin trades in the same day. "In Japan, the Nikkei 225 was essentially flat after the much anticipated announcement from the BOJ proved a bit of a damp squib. However the Mothers index of small cap companies continue to fly...yet no one really seems to have noticed," said a Societe General note. The Mothers index, or the "market of the high-growth and emerging stocks", has risen 48 percent so far this month and has packed on 72 percent since a low struck in early June 2012. By mid-morning, the broader Topix was up 0.9 percent at 922.12. Despite the recent rally, the benchmark remains well below the 2008 financial crisis while the S&P 500 Index and Germany's benchmark stock index have both already exceeded that level.