Shizuoka Financial Group, Inc.

If the financial condition of business partners deteriorates due to domestic and overseas economic downturns, natural disasters, geopolitical risks, etc., non-performing loans and credit-related costs may increase, adversely affecting performance and capital. Approximately half of Shizuoka Bank's loans are extended within Shizuoka Prefecture, giving it a structure susceptible to economic trends in its core business base. In response, the Group is implementing appropriate additions to the allowance for loan losses, business revitalization support through collaboration among Group companies, and risk capital allocation management.

There is a risk that a significant decline in stock prices could generate valuation losses on held stocks and investment trusts, and that a significant rise in domestic and overseas interest rates could generate valuation losses on bonds such as Japanese government bonds and U.S. mortgage bonds. These risks directly lead to deteriorating performance and a decrease in capital. In response, the Group sets limits on the balance and loss amount of securities, quantifies and monitors risk using statistical methods, and conducts hedging transactions as necessary.

There is a risk that funding could become tight and funding costs could increase due to deposit outflows caused by turmoil in financial markets or a decline in the Group's creditworthiness. There is also market liquidity risk, in which held securities cannot be sold smoothly and must be sold at unfavorable prices. In response, the Group suppresses mismatches between fund management and funding, sets limits on the amount of funds to be raised within a certain period, and conducts stress tests assuming financial crises.

If a system outage or malfunction occurs due to a disaster, equipment failure, or program defect, or if a service outage, data leak, or fraudulent transaction occurs due to a cyberattack, this could adversely affect performance through the suspension of settlement functions and loss of social credibility. This applies to Group systems, including systems subject to the Economic Security Promotion Act, as well as third-party systems. In response, the Group has established a cybersecurity response organization, cooperates with external institutions on information sharing, and conducts regular response drills.

If customer information or management information is leaked, lost, falsified, or misused, this could adversely affect performance through the loss of social credibility. Clerical errors, system failures, and information leaks at outsourcing partners also pose similar risks. In response, the Group continuously conducts RCSA (Risk and Control Self-Assessment) and formulates and trains for contingency plans.

Regional population decline, the falling birthrate and aging population, digitalization, decarbonization, and geopolitical risks such as changes in trade policy in various countries or the occurrence of conflicts may adversely affect the real economy and trigger rises in raw material and energy prices as well as inflation. If these effects spread to the social and economic activities of the Group's business area, they could lead to an increase in non-performing loans and credit-related costs through the deterioration of business partners' financial conditions. In response, the Group is addressing materiality issues through its business activities and working toward the sustainable growth of the regional community and economy.

Credit risk may increase due to damage to business partners' properties from natural disasters such as wind and flood damage, or through the impact on business partners' operations from climate change-related regulations and social demands. Regulatory change risk may also increase due to the tightening of regulations related to climate change response. In response, the Group is advancing its response and disclosure in terms of both opportunities and risks across the four categories of "Governance," "Strategy," "Risk Management," and "Metrics and Targets" based on the TCFD recommendations.

The Group is subject to internationally uniform capital adequacy ratio and leverage ratio regulations based on Basel III, and these ratios fluctuate due to changes in retained earnings, valuation differences on held securities, and changes in risk assets. If the ratios fall below required levels, the Group may be subject to orders from financial authorities restricting outflows to outside parties or suspending all or part of its operations. In addition, restrictions on the recognition of deferred tax assets and changes in impairment accounting standards for fixed assets could also affect the capital adequacy ratio.

In addition to financial deregulation, the digitalization of financial services, and the ongoing population decline, the competitive environment—including the fund management and funding environment—is changing due to the entry of companies from other industries into the financial sector and changes in the interest rate environment resulting from shifts in the Bank of Japan's monetary policy. If the Group is unable to gain a competitive advantage over other financial institutions and financial service providers amid intensifying competition, its initial management strategy may fail to succeed, potentially affecting performance. Under the second Medium-Term Management Plan "Xover 2.0," the Group is conducting a fundamental review of its management strategy.

If a major earthquake occurs, particularly centered on Shizuoka Prefecture—the Group's core business base—this could affect performance not only through damage to the Group itself but also through increased credit risk resulting from the deterioration of business partners' performance. Shizuoka Prefecture is located near the anticipated epicenter of the Nankai Trough megaquake, making this a regional concentration risk of particular importance. In response, the Group explicitly incorporates earthquake risk in its risk capital allocation management and formulates and trains for contingency plans.