Mizuho Financial Group Inc. (8411) may cut pay and add new board members to mollify investors, lawmakers and regulators after failing to end loans to crime groups in the biggest scandal of President Yasuhiro Sato’s two-year tenure.
Sato, who said earlier this month that the bank’s initial report to regulators was inaccurate, will explain to the Financial Services Agency on Oct. 28 how it will improve compliance, company spokeswoman Masako Shiono said by phone today. Japan’s third-biggest bank by market value will probably offer remedies including pay reductions for top executives, said Yoshinobu Yamada, an analyst at Deutsche Bank AG in Tokyo.
Mizuho shares have lost 8.1 percent since the regulator on Sept. 27 told it to strengthen internal controls after failing to break off the more than 200 million yen ($2 million) of transactions with criminal organizations. Sato’s leadership was rocked less than two weeks later when the bank reversed its stance that senior managers weren’t aware of the loans.
“One issue that could become a problem for Mizuho is the question of when senior management, including Mr. Sato, knew about these loans,” said David Marshall, an analyst at CreditSights Inc. in Singapore. “It may be hard for him to survive if it becomes clear that he was in a position to know about them and did nothing.”
The company plans to punish more than 30 executives at Mizuho Bank Ltd. including Sato, whose compensation will be suspended for half a year, the Nikkei newspaper reported today, without attribution. Takashi Tsukamoto will step down as chairman of the unit while keeping the post for the parent company, the newspaper said.
Sato had a 40 million yen base salary last fiscal year as president of the corporate banking unit that has since been merged, company filings show. His total annual compensation including from the parent company was 116 million yen, according to a report Mizuho submitted to regulators in June.
The bank hasn’t made any decisions about management changes, Mizuho said in a statement today. Sato will brief the press on Oct. 28 about the bank’s report to the regulator, Shiono said.
Financial Services Minister Taro Aso said this week that he will respond appropriately to the company’s reports, including the findings of outside lawyers commissioned by Mizuho to probe the matter. Aso, who is also finance minister, declined to comment on the case at a news briefing today.
Shares of Mizuho fell 1.5 percent to 204 yen at the close of trading in Tokyo. The stock has gained 30 percent this year, trailing the benchmark Topix Index (TPX)’s 37 percent advance.
Mizuho made 230 transactions, mostly loans for automobiles, through its Orient Corp. (8585) consumer credit affiliate, according to the regulator. At least four senior executives responsible for compliance knew of the loans and didn’t inform superiors, the bank said Oct. 4.
Four days later, Mizuho said that top managers were aware of the transactions, contradicting the earlier remarks. Also on Oct. 8, Sato told reporters that then-chief of the banking unit, Satoru Nishibori, knew of the assets as early as 2010.
Sato, who took the helm of Mizuho in June 2011, said he himself was in a position to have found out about the loans as early as July 2011, when reports mentioning them were circulated at executive meetings. He apologized, saying that while he didn’t know of the lending until the FSA briefed the bank on its investigation in March, he bears responsibility.
“Backtracking on the remarks was extraordinary,” Tatsuya Ito, a ruling Liberal Democratic Party lawmaker and former banking minister, said in an interview on Oct. 24. “Doubts over Mizuho’s governance despite its status as a megabank are drawing strong responses from the public.”
Other lawmakers from both sides of parliament have demanded answers from Sato.
Isshu Sugawara, chairman of the ruling Liberal Democratic Party’s finance committee, told reporters on Oct. 18 that it was “outrageous” Mizuho failed to address the loans. He said he wants Sato to appear before the panel as it examines whether the FSA’s supervision of Mizuho was adequate. Opposition Democratic Party of Japan lawmaker Akira Nagatsuma said in parliament on Oct. 21 that Sato should be summoned to the Diet.
Mizuho’s president will avoid having to resign if he comes up with “convincing measures and a decent explanation,” said Masamitsu Ohki, who manages about 7 billion yen of stocks including banks at Stats Investment Management Co. in Tokyo. “Sato’s reputation in the market is relatively high.”
Sato has driven measures designed to improve management at Mizuho, which has been penalized for lapses ranging from computer glitches to trading errors since its creation in 2000 through the merger of Dai-Ichi Kangyo Bank Ltd., Fuji Bank Ltd. and Industrial Bank of Japan Ltd.
In May 2011, the FSA ordered Mizuho to improve operations and repair its “corporate culture” following computer malfunctions at its retail bank that delayed transactions in the wake of the nation’s March 2011 earthquake and tsunami.
When Sato was named president the following month, he vowed to scrap a practice of promoting top officials based on their past ties with the founding banks. He took the helm of Mizuho Bank, a unit formed in July by combining the retail and corporate lending arms, emphasizing the slogan “one Mizuho.”
The parent company’s board of directors consists of 12 members including three from outside the organization. At its lending unit, the board of directors has eight members without any external directors.
Corporate governance in Japan is “notoriously weak” with insiders dominating boards, Marshall of CreditSights wrote in an e-mail. “More independent voices on the board would help put in place procedures to ensure compliance with internal rules.”
Yamada at Deutsche Bank said top managers will probably keep their posts. Cutting pay and tightening controls would be in line with earlier cases involving Japanese banks’ dealings with criminal syndicates known as the yakuza, he said.
In 2007, when the FSA found that a branch of Mitsubishi UFJ Financial Group Inc. (8306) did business with an “antisocial institution” for more than 30 years, the bank cut executive pay and established an anti-money laundering office. The agency ordered it to halt loans to new corporate clients for a week and barred it from opening branches for six months.
“From a long-term perspective the current incident will also raise crisis awareness and boost momentum for greater unification within the group,” Yamada said.
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