May 13, 2016 / 7:01 AM / 3 years ago

UPDATE 2-Japan Post, bank unit see second year of profit decline on negative rates

* Japan Post and bank unit book 12 pct declines in net profit

* Japan Post Holdings sees profit tumbling by a quarter this year

* Bank unit looking at investing in alternative assets (Recasts, adds comment from Japan Post Bank executive)

By Thomas Wilson and Takahiko Wada

TOKYO, May 13 (Reuters) - Japan Post Holdings and its main banking unit reported drops in annual profit and forecast another year of decline, as the central bank’s negative interest rate policy eats into returns on the bank unit’s huge holdings of Japanese government bonds.

Their outlooks underscore a challenging environment for Japan’s biggest financial firm and the country’s other financial institutions such as insurers, pushing them to diversify away from domestic government bonds.

Reporting for the first time since listing as part of the nation’s biggest sale of state assets in three decades, both the holding company and Japan Post Bank Co Ltd saw net profit tumble 12 percent in the past financial year.

While Japan Post Holdings’ annual results managed to beat analysts’ estimates, its forecast for profit sliding by a quarter to 320 billion yen ($2.9 billion) this year was surprisingly weak - undershooting a market consensus of 384 billion yen.

“How we bounce back from the impact of negative rates will be a major challenge this financial year,” Norito Ikeda, president of Japan Post Bank, said at an earnings briefing.

The bank plans to allocate “a few hundred billion yen” toward alternative assets such as private equity, real estate and hedge funds this business year, its chief investment officer told Reuters this week.

While the bank is not like commercial lenders that make money off loans, it is the nation’s biggest deposit taker and has an investment portfolio of over $1.8 trillion.

The holdings company, which is responsible for Japan’s extensive network of post offices and employs more than 430,000 people full- or part-time, owns 74 percent of the banking unit and is heavily exposed to its performance.

The other main unit, Japan Post Insurance Co - the nation’s biggest by asset size - said annual profit rose 4.4 percent as more people bought insurance policies, beating analysts’ estimates. The insurance unit forecast a 1.3 percent increase in profit this business year.

The partial privatisation of Japan Post and its banking and insurance divisions last year raised a combined 1.4 trillion yen for the government.

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