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By Taiga Uranaka and Taro Fuse TOKYO (Reuters) - The head of Mizuho Financial Group looks set to survive the revelation of bank loans to mobsters, a move that could revive his recently flagging efforts to improve corporate governance at Japan's second-largest bank by assets. Mizuho will not sack Yasuhiro Sato as president and CEO, but may suspend his pay for some period, people familiar with the matter said on Friday. The bank is expected to announce its response to the scandal on Monday. The uproar over the mob loans has sidetracked Sato over the past month from his quest to unify the fractious financial group, which lags Japan's other two "megabanks" in key measures of financial performance. It comes as Mizuho is trying to expand its loan business globally and establish itself as "Asia's core bank". But the mob loans reflect badly on Mizuho's past governance more than on Sato's reform drive, said banking analyst Toyoki Sameshima at BNP Paribas Securities. "The matter gives all the more reason for Sato to push forward with fixing the bank's problems," Sameshima said. "I don't think it will be a significant setback to Sato's efforts to change the bank or his leadership." In the latest scandal involving a major Japanese company having ties with the underworld, regulators disclosed in late September that Mizuho had funneled some $2 million through an affiliated financing firm to organized crimes figures in 230 small transactions, mostly car loans. Mizuho initially said that knowledge of the loans went only as far as the bank's compliance officers, but later the bank acknowledged that the transactions had been reported to top officials, including Sato, at board meetings. The Financial Services Agency late last month ordered Mizuho to improve its business practices after it failed to stop the mob lending more than two years after finding out about the loans. Working with an outside panel of lawyers, Mizuho aims to submit a report to the regulator on Monday. The scandal, in addition to highlighting the pervasive reach of "yakuza" crime syndicates and other underworld elements throughout Japan Inc, also epitomizes the lapses in corporate governance that Sato himself has been struggling to fix. "Sato was getting a tighter grip on the bank and his leadership was getting traction," said a former Mizuho executive. But the scandal "has pretty much undone it." Mizuho is particularly vulnerable to bad governance and compliance because 13 years after its formation, in a three-way merger of failing banks during Japan's financial crisis, it remains three banks in one. "ONE MIZUHO" Sato has been viewed very favorably by investors as "a symbol of One Mizuho", the bank's unification effort, said banking analyst Yoshinobu Yamada at Deutsche Securities. The 61-year-old banker has been trying to unify a financial giant that still maintains separate cultures and loyalties from its long-defunct constituent lenders: 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 admit. Japanese mergers often leave legacy factions, but Mizuho is an extreme case because none of the three banks clearly dominated. Top Mizuho jobs have rotated among the three factions, with none stamping its imprint on the broader institution. That has contributed to the bank's inability to generate profits and shareholder value commensurate with its enormous heft. Mizuho's assets are 25 percent smaller than those of Japan's biggest bank, Mitsubishi UFJ Financial Group , but Mizuho's market value is a full 44 percent lower and its net profits for the latest quarter were 34 percent lower than MUFG's. Even more starkly, Mizuho is 16 percent bigger by assets than Sumitomo Mitsui Financial Group but its market capitalization and profits are nearly 30 percent lower. Sato, an urbane banker with a wealth of international contacts, is a product of IBJ, originally a government-backed bank that helped finance Japan's rise as an industrial power. IBJ bankers have famously considered themselves an economic and social elite, especially compared with their Dai-Ichi Kangyo and Fuji colleagues, who contributed a massive retail presence to Mizuho. Fighting to break the silo mentality, Sato at one point rejected a proposed line-up of senior management that favored ex-IBJ executives, said a Mizuho official familiar with the process. Sato also led July's consolidation of Mizuho's corporate and retail lending units, also meant to unify the Mizuho brand and expertise. "NOT NOTICED" After a ritual deep bow of contrition at a news conference earlier this month, Sato said he had been "in a position to know" about the mob loans, but had not noticed them. He said that at eight meetings of the Mizuho holding company and retail bank in 2011 and 2012, the loans were mentioned in attachment documents about "the resolution of transactions with anti-social forces" - a euphemism for the yakuza - at Mizuho-affiliated consumer-finance firm Orient Corp . "We have no alternative but to say that the Mizuho group overall was lacking in awareness of the issues," Sato said. "I deeply regret this." A former Mizuho director said meeting documents would regularly have a line on the bank's handling of anti-social forces, which were treated as little more than a statistical box-ticking exercise. Sato is expected to keep his post in part because the FSA initially backed him to take the helm at Mizuho and they see no viable successor. "He's eloquent. He's full of ideas," said a source at the regulator. "The FSA pushed for Mr. Sato." A Mizuho spokesman said the bank had made no decision on how it would deal with the scandal. The bank in recent weeks has declined to make Sato or other top executives available for interview. Mizuho's stock has fallen 8.5 percent since the lending scandal emerged, versus declines of just under 6 percent for MUFG and SMFG and 5 percent for the broader Tokyo market. "Although Mizuho is underperforming its rival megabanks, market consensus is that there won't be a further surprise to hit the bank if Sato is not sacked," said Fumio Matsumoto, a fund manager at T&D Asset Management, who had continued to hold Mizuho shares in his portfolio since the incident. "What the stock market had feared was the possibility that Sato would resign." Sato will likely have his pay suspended for six months while more than 30 senior executives will also be punished, Japanese media reported on Friday. Takashi Tsukamoto is likely to step down as chairman of Mizuho Bank, the firm's core banking unit, while remaining chairman of the holding company, sources told Reuters. (Additional reporting by Ayai Tomisawa; Writing by William Mallard)