Kyoto Financial Group, Inc.

There is a risk that non-performing loans and credit-related expenses may increase beyond expectations due to economic trends, fluctuations in real estate prices, deterioration in the business conditions of borrowers, and other factors. Actual loan losses may significantly exceed the assumptions and estimates used when recording allowances for loan losses, and additional provisioning may be required at a later date. The Group conducts self-assessments every six months and strives for appropriate management, treating the maintenance of asset soundness as one of its most important management issues.

When interest rates rise, there is a risk of a decline in the value of the loan and bond portfolios and a narrowing of interest margins, and when stock prices fall, there is a risk of impairment and valuation losses on the equity portfolio. In addition, if exchange rates fluctuate relative to the net position of foreign currency-denominated assets and liabilities, yen-denominated earnings may decrease. The Group quantifies risk amounts and allocates capital based on its Comprehensive Risk Management Regulations, and reviews these on a semi-annual basis.

Given the asset-liability structure of short-term funding and long-term investment, there exists funding liquidity risk, whereby deterioration in financial condition or other factors could make it impossible to secure necessary funds, as well as market liquidity risk, whereby market turmoil could force transactions under significantly less favorable conditions than usual. If these risks materialize, they could adversely affect business performance and financial condition through a sharp rise in funding costs or the occurrence of losses. The Group manages liquidity risk under its comprehensive risk management framework.

There is a risk of loss, alteration, or leakage of vast amounts of information assets, including customer information, as well as a risk of loss due to computer system downtime, malfunction, or cyberattacks. If systems are illegally used as a result of cyberattacks or other incidents, this could have a significant impact on business continuity and customer protection. The Group has established an "Information Security Policy" and "Information Security Standards," and maintains backup centers and implements ongoing cybersecurity measures.

The Company and Kyoto Bank are legally required to maintain a capital adequacy ratio of at least the domestic standard (4%), and if the ratio falls below this standard, there is a risk of receiving an order for suspension of all or part of business operations from the Commissioner of the Financial Services Agency. Factors that could reduce the capital adequacy ratio include an increase in credit-related expenses, impairment due to stock price declines, reductions in deferred tax assets, and changes in regulations or accounting standards. The Group conducts integrated stress tests to prepare for scenarios in which multiple risks materialize simultaneously.

If deficiencies in measures to prevent money laundering, terrorist financing, and proliferation financing result in the Group's operations being used for such purposes, there is a risk of sanctions being imposed by domestic and foreign financial authorities. In addition, business partners and financial institutions may terminate transactions with the Group, which could adversely affect business operations, performance, and financial condition. The Group is working to enhance its measures against money laundering and related risks based on the basic policy and operational policy determined by the Board of Directors.

The Group recognizes both physical risk, in which natural disasters such as flooding damage business partners' and the Company's own assets, and transition risk, in which changes in laws and regulations and shifts in supply and demand accompanying the transition to decarbonization worsen the business performance of business partners. If these risks materialize, they could adversely affect business performance and financial condition through increased credit-related expenses or a contraction in business activities. The Group is engaged in information disclosure based on its support for the TCFD recommendations, but there is also a risk that insufficient efforts in this area could damage corporate value.

Intensifying cross-industry competition resulting from deregulation of the financial system could adversely affect the Group's business and performance if the Group is unable to secure a competitive advantage. There is also a risk that ongoing business strategies may fail to achieve their originally expected results due to the materialization of various risks or unforeseen changes in the business environment. As the Group's main business base is centered on Kyoto Prefecture and the wider Kansai region, its structure makes it particularly susceptible to economic trends in specific regions.

There is a risk of incurring losses (including fines, penalties, and damages) arising from negligent breaches of obligations to customers or inappropriate business practices in the course of conducting operations. Future changes in regulations, laws, policies, business practices, and interpretations may also adversely affect the Group's business and performance. The Group positions compliance as one of its most important management issues and strives to establish a framework for legal compliance based on the basic policy and compliance program determined by the Board of Directors.

As a bank holding company, the Company depends on dividends and other payments from Kyoto Bank for the majority of its income, and the amount of such payments may be restricted by regulatory or contractual limitations. If Kyoto Bank fails to record sufficient profit and is unable to pay dividends, the Company may become unable to pay dividends to its shareholders. Changes in the assumptions underlying retirement benefit obligations, declines in the market value of pension assets, and the occurrence of impairment losses on fixed assets are also factors that could adversely affect the performance and financial condition of the Group as a whole.