A surge in Japanese share prices last year allowed banks to enjoy windfall profits from the sale of hefty shareholdings, while super-low domestic interest rates improved lending margins.

Profit turnarounds were reported on Wednesday by Dai-Ichi Kangyo Bank Ltd (DKB), Japan's third-ranked commercial bank, Fuji Bank Ltd, Industrial Bank of Japan Ltd (IBJ), Tokai Bank Ltd and Asahi Bank Ltd.

But larger-than-expected loan-loss charges revealed lingering bad-debt problems, and analysts said a recent rise in bankruptcies, coupled with stock market volatility, has cast uncertainty over the banks' outlook.

"The bad-debt problem will continue to plague the banks, continue to be a huge issue for them," said James Fiorillo, senior analyst at ING Barings in Tokyo. Japanese banks are still saddled with bad debts accumulated after the bursting of an asset price bubble in the early 1990s. DKB said a total of 1.77 trillion yen ($16.62 billion) of problem loans remained at the end of March 2000, compared with 2.25 trillion a year earlier.

Analysts say a recent wave of merger activity, which will halve the number of major Japanese banks to eight, will have positive effects on banks over the medium term by removing excess capacity, enhancing capital bases.

But in the short term these moves are seen bringing more costs than profits. "The extra costs involved in this (merger activity) could weigh heavily on banks' results," said Brian Waterhouse, senior banking analyst at HSBC Securities.

The rosy results were in line with expectations and helped boost bank shares on Wednesday despite a drop in Tokyo's broader market. The banking sub-index on the Tokyo Stock Exchange ended up 0.63 percent at 1,853.99 while the key Nikkei average finished down 1.68 percent at 16,044.44.

On the final day of a series of bank earnings, Dai-Ichi said it posted a 218.9 billion yen ($2.06 billion) in parent current profit in the year to March 31. That represets a sharp reversal from the previous year's 604.5 billion yen loss. Current profits are before tax and include profits and losses from non-operational activities.

DKB's shares ended up 4.59 percent at 889 yen.

Fuji Bank, Japan's sixth-ranked commercial bank, said it posted a 223.34 billion yen parent current profit against a 588.9 billion yen loss a year earlier.