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UPDATE 1-Mizuho Q2 profit falls 12 pct on weak lending business

* Q2 net profit Y198.4 bln vs Y225.5 bln a year earlier

* Smaller bad loan costs, gains from selling stocks are positive (Changes to quarterly figures)

TOKYO, Nov 13 (Reuters) - Mizuho Financial Group posted on Monday a 12 percent drop in quarterly profit, as ultra-low interest rates hurt income at its core banking business.

Net profit at Japan's third-largest lender by assets came in at 198.4 billion yen ($1.75 billion) for the July-September period, down from 225.5 billion yen a year earlier, a Reuters calculation based on the bank's six-month results shows.

Mizuho and other Japanese banks have been hit by diminishing returns from lending under the Bank of Japan's massive monetary easing, which has pushed down interest rates on mortgages, car loans and corporate borrowings.

Mizuho's net interest income, or profits from lending and bond coupons, fell to 407.4 billion yen for the first six months, from 436.4 billion yen a year earlier.

But a bright spot for Mizuho, like other Japanese banks, was bad loan costs that narrowed, with a gradual improvement in the country's economy improving borrowers' credit-worthiness.

Mizuho's profit was also helped by gains from selling its stock holdings, which came at 107.9 billion yen in the April-September period, up from 60.9 billion yen a year earlier.

Bigger rivals Mitsubishi UFJ Financial Group and Sumitomo Mitsui Financial Group are scheduled to report their first-half results on Tuesday.

For the full-year through March, Mizuho kept its net profit forecast of 550 billion yen, down 8.8 percent from the previous year and above an average estimate of 547.6 billion yen from 16 analysts polled by Thomson Reuters. ($1 = 113.4300 yen) (Reporting by Taiga Uranaka; Editing by Himani Sarkar and Muralikumar Anantharaman)