Report due on Japan's Mizuho mob-loan scandal, serious penalty unlikely

Reuters

* Panel to deliver report on Monday, state regulator toreview

* CEO Sato expected to keep job, Mizuho Bank chair couldquit

* Some executives likely to take pay cuts

* Mizuho future overseas growth plans likely to bescrutinised

By Taiga Uranaka

TOKYO, Oct 28 (Reuters) - Mizuho Financial Group will try to put a loans-to-mobsters scandal behind it on Monday,but while Japan's second-biggest bank by assets may escapeserious penalty it faces an uphill battle in catching up withits expanding peers.

A panel of lawyers, appointed by Mizuho, will report itsfindings on how the bank failed for more than two years to endthe loans to "yakuza" gangsters after discovering the shadytransactions.

Mizuho is then expected to announce its response to thescandal, which hit the bank just as it was seeking to improveits corporate governance and accelerate growth, especially inoverseas markets.

Yasuhiro Sato will likely keep his job as president and CEOof the financial group and its core Mizuho Bank unit, peoplefamiliar with the matter told Reuters last week, allowing Satoto resume his drive to unify the fractious bank, bring itscompliance under tighter control and establish the lender as"Asia's core bank". [ID: nL3N0IF04V]

Mizuho will likely suspend Sato's pay for some period, whileTakashi Tsukamoto is expected to step down as Mizuho Bankchairman, the sources said.

In the latest scandal involving a major Japanese company'sties to the underworld, regulators disclosed in late Septemberthat Mizuho had learned in late 2010 of $2 million in loans toorganised crime figures. The 230 small transactions, mostly carloans, were made by Mizuho consumer-finance affiliate OrientCorp and were among bulk loans the bank later boughtfrom Orient.

The Financial Services Agency (FSA) ordered Mizuho toimprove business practices after the bank did almost nothingabout the mob lending for more than two years. Mizuho initiallysaid that knowledge of the loans went only as far as the bank'scompliance officers, but days later the bank acknowledged thatthe transactions had been reported to top officials, includingSato, at board meetings.

Monday's report by the outside panel is expected to showthat the bank was sloppy in its handling of the scandal but thatit did not intentionally mislead the authorities, sources said.

On that basis, Mizuho hopes to keep Sato at the helm andmove beyond the scandal, but the pressure may not abate quickly.Some members of parliament have called for Sato to testify onthe affair and, people familiar with the matter say, the FSA isunder pressure to appear tough as questions arise over why itdid not uncover the shady loans earlier.

Finance Minister Taro Aso, who heads the FSA, said on Fridaythe regulator would decide what action to take based on Monday'spanel report.

LEFT BEHIND BY RIVALS

Sato is expected to hold a news conference on Monday toannounce the bank's response. More than 30 executives will takepay cuts, and Mizuho will ask about a dozen former executives toreturn some of their compensation, Japanese media said.

The scandal, in addition to highlighting the pervasive reachof "yakuza" crime syndicates and other underworld elementsthroughout Japan Inc, highlighted the lapses in corporategovernance that Sato himself has been struggling to fix.

The bank, 13 years after its formation in a merger duringJapan's financial crisis, remains riven by factions associatedwith its legacy banks: the Industrial Bank of Japan, Dai-IchiKangyo Bank and Fuji Bank.

The tussling fiefdoms have fostered a culture of protectingturf and refraining from taking broad responsibility forproblems, Mizuho bankers say.

As a result of this disunity and other factors, the companyhas failed to match its main competitors, Mitsubishi UFJFinancial Group and Sumitomo Mitsui Financial Group, in key measures of profitability.

Mizuho is trying to expand its loan business globally but itwas left out earlier this year when the other two megabanks tookmajor steps to expand in Southeast Asia.

MUFG, Japan's largest lender, in July agreed to buy up to 75percent of Bank of Ayudhya Pcl, Thailand'sfifth-largest lender, in a deal worth $5.6 billion. In May SMFGagreed to buy an up to 40 percent stake in BTPN, anIndonesian lender backed by TPG Capital.

While the other two banks were looking for opportunities,Mizuho was looking inward, focusing on implementing Sato's "OneMizuho" plan, the July merger of its corporate and retailbanking units.

That consolidation went without a hitch and Mizuho sought togo on the offensive. It approached Australia and New ZealandBanking Group Ltd about buying ANZ's 39.2 percent stake in PTBank Pan Indonesia Tbk valued around $570 million,sources told Reuters in August.

But even if Mizuho escapes the mob scandal without cripplingpenalties, it may find itself constrained.

"I don't think Japanese regulators will willingly approveoverseas acquisitions by Mizuho for a while, given the scandal,"said a financial industry analyst in Tokyo, who declined to benamed given the sensitivity of the matter.

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