By Taiga Uranaka
TOKYO (Reuters) - Mizuho Financial Group (TYO:8411) looks likely to escape serious penalty in a loans-to-mobsters scandal after an outside panel said on Monday that Japan's second-biggest bank by assets did not intentionally try to hide the shady lending from investigators.
But while Mizuho's president and CEO, Yasuhiro Sato, is now expected to keep his job and resume his efforts to unify the fractious "megabank" and improve its governance, Mizuho faces an uphill battle in catching up with its expanding peers.
The external panel of lawyers said in a report that Mizuho's management failed to appreciate the gravity of collaborating with organized crime, but said the bank's initial false report to regulators was a mistake and not an intentional cover-up.
"It is highly regrettable that a bank that represents Japan was involved in such a problem and we cannot ignore the fact that such incidents were allowed to be carried on within the organization," the panel said.
The scandal, involving $2 million worth of loans funneled to "yakuza" gangsters, hit the bank just as it was seeking to improve its corporate governance and accelerate growth, especially in overseas markets.
Sato will likely remain president and CEO of the financial group and its core Mizuho Bank unit, people familiar with the matter told Reuters last week, allowing him to resume his reform drive and seek to bring its compliance under tighter control and establish the lender as "Asia's core bank".
Mizuho will likely suspend Sato's pay for some period, while Takashi Tsukamoto is expected to step down as Mizuho Bank chairman, the sources said.
In the latest scandal involving a major Japanese company's ties to the underworld, regulators disclosed in late September that Mizuho had learned in late 2010 of the mob loans. The 230 small transactions, mostly car loans, were made by Mizuho consumer-finance affiliate Orient Corp (TYO:8585) and were among bulk loans the bank later bought from Orient.
The Financial Services Agency (FSA) ordered Mizuho to improve business practices after the bank did almost nothing about the mob lending for more than two years.
Mizuho initially said that knowledge of the loans went only as far as the bank's compliance officers, but days later the bank acknowledged that the transactions had been reported to top officials, including Sato, at board meetings.
Based on the panel's finding that Mizuho did not intentionally deceive the FSA, the bank hopes to move beyond the scandal, but the pressure may not abate quickly. Some members of parliament have called for Sato to testify on the affair and, people familiar with the matter say, the FSA is under pressure to appear tough as questions arise over why it did not uncover the shady loans earlier.
Finance Minister Taro Aso, who heads the FSA, said on Friday the regulator would decide what action to take based on Monday's panel report.
LEFT BEHIND BY RIVALS
More than 30 executives will take pay cuts, and Mizuho will ask about a dozen former executives to return some of their compensation, Japanese media said.
The scandal, in addition to highlighting the pervasive reach of "yakuza" crime syndicates and other underworld elements throughout Japan Inc, highlighted the lapses in corporate governance that Sato himself has been struggling to fix.
The bank, 13 years after its formation in a merger during Japan's financial crisis, remains riven by factions associated with its legacy banks: the Industrial Bank of Japan, Dai-Ichi Kangyo Bank and Fuji Bank.
The tussling fiefdoms have fostered a culture of protecting turf and refraining from taking broad responsibility for problems, Mizuho bankers say.
As a result of this disunity and other factors, the company has failed to match its main competitors, Mitsubishi UFJ Financial Group and Sumitomo Mitsui Financial Group , in key measures of profitability.
Mizuho is trying to expand its loan business globally but it was left out earlier this year when the other two megabanks took major steps to expand in Southeast Asia.
MUFG, Japan's largest lender, in July agreed to buy up to 75 percent of Bank of Ayudhya Pcl (SET:BAY), Thailand's fifth-largest lender, in a deal worth $5.6 billion. In May SMFG agreed to buy an up to 40 percent stake in BTPN (BTPN.JK), an Indonesian lender backed by TPG Capital (TPG.UL).
While the other two banks were looking for opportunities, Mizuho was looking inward, focusing on implementing Sato's "One Mizuho" plan, the July merger of its corporate and retail banking units.
That consolidation went without a hitch and Mizuho sought to go on the offensive. It approached Australia and New Zealand Banking Group Ltd about buying ANZ's 39.2 percent stake in PT Bank Pan Indonesia Tbk (PNBN.JK) valued around $570 million, sources told Reuters in August.
But even if Mizuho escapes the mob scandal without crippling penalties, it may find itself constrained.
"I don't think Japanese regulators will willingly approve overseas acquisitions by Mizuho for a while, given the scandal," said a financial industry analyst in Tokyo, who declined to be named given the sensitivity of the matter.
(Additional reporting by Taro Fuse and Noriyuki Hirata; Editing by William Mallard, Jeremy Laurence and Alex Richardson)
- Mizuho Financial Group
- Yasuhiro Sato
- Mizuho Bank