San ju San Financial Group,Inc.

Risk that non-performing loans increase due to deterioration in the domestic and overseas economic environment, fluctuations in real estate prices and stock prices, deterioration in the business conditions of counterparties, and other factors. If the allowance for doubtful accounts falls short of actual credit losses, or if additional provisions become necessary due to a decline in collateral value, this may adversely affect business results and financial condition through an increase in credit-related costs. The Group is implementing measures such as a rigorous screening system, off-balance-sheeting of non-performing loans, and provisioning of the allowance for doubtful accounts, while also practicing risk management using VaR (99% confidence interval) to grasp risk volume and utilizing a capital allocation system.

As the Group's principal business is Banking, the yields on loans and bond investments and the funding costs of deposits are linked to market interest rate trends. Given the existence of amount and maturity mismatches between fund management and funding, if unexpected interest rate fluctuations occur such that the rise in funding costs exceeds the rise in investment yields, there is a risk that the interest margin will narrow. In particular, given the recent changes in the interest rate environment, the impact on business results and financial condition is significant. The Group measures risk volume using VaR and manages it through a capital allocation system.

The Group holds securities such as government bonds and other marketable bonds and stocks, and if the prices of these decline due to deterioration in market conditions, valuation losses and losses on sales may occur, which could adversely affect business results and financial condition. In addition, a decline in the market value of held securities may also affect the capital adequacy ratio through an increase in impairment losses. The Group grasps risk volume using VaR and manages it through a capital allocation system.

The Group is legally obligated to maintain a consolidated and non-consolidated capital adequacy ratio of 4% or more under domestic standards, and if it falls below the required level, there is a risk of receiving an order from the Commissioner of the Financial Services Agency to suspend all or part of its business operations. Major factors affecting the capital adequacy ratio include an increase in credit-related costs, an increase in impairment losses on held securities, fluctuations in the risk asset portfolio, and changes in regulatory standards and calculation methods. Although the Group currently maintains a sufficient level, continuous management is required against compound adverse scenarios.

There is a risk that the Group will be unable to secure necessary funds, or will be forced to raise funds at significantly higher interest rates, due to deposit outflows caused by intensifying competition for deposits with financial institutions including internet banks, or due to deterioration in the overall financial markets or in the Group's own creditworthiness. The Group strives to conduct appropriate liquidity management, including holding a certain amount or more of highly liquid assets, but a sudden change in market conditions could adversely affect business results and financial condition.

If failures such as the shutdown or malfunction of computer systems that underpin the core of banking operations, unauthorized use, or cyberattacks occur, this could cause serious disruption to business operations and adversely affect business results and financial condition. The increasing sophistication of financial crimes (such as cash card forgery and theft, and unauthorized fund transfers via internet banking) is also a factor increasing countermeasure costs and customer compensation. The Group strives to thoroughly manage, monitor, and maintain its systems and strengthen security.

The Group's principal business base is Mie Prefecture, Aichi Prefecture, and surrounding areas, and a downturn or deterioration in the regional economy would constrain business expansion and also lead to increased credit risk through deterioration in the business conditions of counterparties. In addition, if a large-scale natural disaster such as a Nankai Trough earthquake occurs, the severe damage to the regional economy could directly and adversely affect the Group's business results and financial condition. The Group responds through measures such as developing and conducting drills for its Business Continuity Plan (BCP), but regional concentration risk remains a structural challenge.

The Group is subject to regulations under the Banking Act, the Financial Instruments and Exchange Act, the Companies Act, and other laws, and if it fails to comply with laws or contractual terms due to violations or other reasons, there is a risk of losses such as penalty costs and damages. In addition, if money laundering, financing of terrorism, or violations of economic sanctions occur, this could lead to administrative sanctions or damage to reputation and loss of credibility. The Group positions compliance as one of its most important management priorities and is working to develop its legal risk management system and strengthen its AML/CFT framework.

The Group holds a large amount of customer information and internal management information, and if leakage, loss, unauthorized use, or other incidents involving this information occur, this could adversely affect business results and financial condition through damages and loss of public trust. Although the Group makes maximum efforts to strengthen its information management system, the risk persists on an ongoing basis against the backdrop of increasingly sophisticated cyberattacks and other threats.

There exist both physical risks, in which the increasing severity of abnormal weather and large-scale natural disasters affects the assets and business activities of counterparties, leading to increased credit risk, and transition risks, in which counterparties are affected by the strengthening of climate-related regulations accompanying the shift to a decarbonized society, leading to increased credit risk. If these risks materialize, they could adversely affect the Group's business results and financial condition. The Group is working to develop a framework to respond to climate change risk.