Nishi-Nippon Financial Holdings, Inc.

Deterioration in the creditworthiness of borrowers or a decline in collateral value could result in unexpected write-offs or increased provisions for credit losses, leading to higher credit costs. Approximately 80% of total credit extended is concentrated among borrowers in Fukuoka Prefecture, creating a structure that is directly susceptible to deterioration in the regional economy or declines in real estate prices. While the Group is working to reduce non-performing loans through corporate revitalization support and off-balance-sheet treatment, it recognizes as a top risk the possibility of a sharp increase in credit costs should a global economic downturn caused by geopolitical risk or other factors spread to the Kyushu economy.

Since loans, securities, and deposits make up the majority of assets and liabilities, and the spread income from fund management and procurement is the main source of earnings, a narrowing of the interest margin due to interest rate fluctuations directly affects business results. Given the existence of mismatches in the amount and duration of fund management and procurement, unexpected interest rate fluctuations could result in reduced earnings or losses. Although risk management is conducted with consideration of the balance between assets and liabilities, responding to sudden changes in market conditions may prove difficult.

The Group holds marketable securities such as stocks and bonds, and declines in share prices could result in impairment or valuation losses, or force sales at prices below the acquisition value. The Group identifies as a top risk the scenario in which valuation gains/losses on held securities deteriorate amid instability in financial markets. If unfavorable sales conditions arise due to financial or risk management reasons, this could adversely affect the financial position and business results.

Amid the increasing sophistication and refinement of cyberattacks, the Group recognizes as a top risk the possibility that cyberattacks on the Group and third parties could result in service outages, data tampering, information leaks, or unauthorized money transfers. While efforts are being made to develop and strengthen security management systems, if such measures prove ineffective, this could adversely affect business operations, financial position, and business results through damage compensation or reputational decline. The risk of customer information leakage via outsourced vendors is also increasing alongside the Group's growing reliance on third parties.

With the rise of new technologies such as fintech and the progress of digitalization and AI utilization, the Group identifies as a top risk the possibility that it may fall behind competitors and new market entrants in terms of customer convenience and cost, resulting in reduced competitiveness. In its business base in Fukuoka Prefecture, the Group faces a severe competitive environment involving local competitor banks, megabanks, government-affiliated financial institutions, IT companies, retail and distribution businesses, and other entrants from different industries. Failure to secure a competitive advantage could lead to a shrinking customer base and erosion of the earnings base.

The Group recognizes as a top risk the possibility that its customer base and earnings base could shrink due to population outflow from Kyushu exceeding expectations. If securing human resources becomes difficult, the Group may be forced to scale back its business lineup or branch network. As the Group's primary business base is Fukuoka Prefecture, changes in regional demographics directly affect its long-term business growth structure.

While subject to regulation under laws and regulations such as the Companies Act, the Financial Instruments and Exchange Act, and the Banking Act, illegal conduct by officers and employees, actions contrary to social norms, or conduct lacking a customer-oriented perspective could result in significant losses or reputational decline. The Group positions anti-money laundering measures and similar efforts as a top management priority, but if such preventive measures fail to function effectively, there is a risk of administrative sanctions, including business suspension or fines. The Group identifies the occurrence of compliance and conduct risk events as a top risk and is working on developing systems as well as training and education for officers and employees.

The Group is legally required to maintain a consolidated capital adequacy ratio of 4% or more under domestic standards, and if it falls below this level, the Financial Services Agency may issue various orders, including partial or full suspension of business operations. Factors cited as potentially having a negative impact on the capital adequacy ratio include increased credit-related expenses, impairment losses on securities, increases in risk-weighted assets, changes in the standards for calculating the capital adequacy ratio, and reversal of deferred tax assets. A downgrade in external credit ratings could also lead to worsened capital and funding conditions or transaction restrictions.

The intensification and increased frequency of natural disasters associated with climate change could cause physical damage to business locations and impairment of collateral value or business suspension at borrowers and investees, and the Group recognizes the occurrence of large-scale earthquakes, storms, and floods as a top risk. There is also a risk that stricter environmental regulations and technological innovation accompanying the transition to a decarbonized society could result in losses or asset value impairment at borrowers and investees. The Group has expressed support for the TCFD recommendations and is working on information disclosure, but if its response is deemed insufficient, this could lead to erosion of corporate value.

As a bank holding company, the Company depends on dividends from its subsidiary bank for the majority of its income, and regulatory or contractual restrictions may limit the amount of dividends received. If the subsidiary bank is unable to record sufficient profit to pay dividends, the Company may become unable to pay dividends to its shareholders. There is also a risk that the management strategy under the medium-term management plan "Mirai Kyoso 2029" may not achieve the initially anticipated results due to significant changes in the external environment.