The Sumitomo Mitsui Financial Group, one of Japan’s three largest banking groups, reported Monday that group net profit dropped 35.7 percent to 441.4 billion yen in 2006 because of losses from consumer lending affiliate Promise Co. and weak banking operations.

Sumitomo Mitsui Banking Corp., the group’s core business, posted a net profit of 315.7 billion yen, down 203.8 billion yen from the previous year.

The bank also reported a temporary loss of 88 billion yen on its investment in Promise.

“The main reason profits dropped (for SMFG) is because of SMBC and Promise,” SMFG President Teisuke Kitayama said at a news conference.

He said profit at SMBC dropped partly because the bank cut its losses on weak performing government and other bonds that were in its portfolio.

Profits at major banks are plunging because of losses being racked up by their affiliated consumer finance companies, such as Acom Co., now partially owned by Mitsubishi UFJ Financial Group, and credit card lender Orient Corp., which is owned by the Mizuho Financial Group.

A Supreme Court ruling in January 2006 effectively repudiated the validity of so-called gray-zone interest rates, subjecting the lenders to increasing demands from borrowers to offer refunds for overcharged interest. This has forced them to set aside huge provisions to cover losses for future refunds.

In December, the Diet enacted a bill to impose a blanket interest rate cap of 20 percent and eliminate gray-zone rates by late 2009.

But SMBC’s profit also took a 30 billion yen hit from a six-month business suspension imposed on its derivatives section from May 2006.

The Financial Services Agency issued the suspension in April 2006 after it learned the bank was forcing corporate borrowers to buy interest swaps to get loans.

Despite the sluggish results, SMFG President Kitayama said the group will adopt a more aggressive international strategy now that it finished repaying public bailout funds to the government last year.

“For more than 10 years in the past, we had to focus on improving our balance sheet,” Kitayama said. “But now we will be more active with our business in the international market, competing with financial institutions in Europe and the United States with our expertise.”

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