SBI Shinsei Bank, Limited

There is a risk that credit-related expenses will increase due to insufficient allowance for loan losses stemming from a global economic downturn or a decline in real estate collateral values triggered by rising or persistently high long-term interest rates, the materialization of geopolitical risk, large-scale natural disasters, pandemics, or sudden shifts in the crypto-asset market. In addition, credit concentration in the financial/insurance and real estate sectors could result in deterioration in these sectors having a direct adverse impact on the Bank Group's business results and financial condition. The Bank has established a response framework that includes scenario analysis to assess expected losses and the impact on the capital adequacy ratio, early-warning management such as risk heat maps and impact analysis, and agile activation of credit control measures.

There is a risk that rising interest rates, triggered by changes in monetary policy or policy rate hikes by central banks around the world, will cause the market value of the held bond portfolio to decline, increasing valuation losses. A sharp decline in stock markets or a drop in bond prices could erode asset value, reducing capital buffers and potentially making it difficult to execute the business plan. The Bank continuously monitors fluctuations in interest rates, foreign exchange, and equity markets, but there is no guarantee that future investment losses can be completely avoided.

There is a risk that intensifying competition for deposits and deposit rate competition amid rising interest rates could lead to an outflow of corporate and retail deposits and additional funding costs. Particularly in the consumer finance business, there is a possibility that increased funding costs cannot be sufficiently passed on to lending rates, reducing profitability, and there are also concerns about a decline in foreign currency liquidity and increased foreign currency funding costs due to geopolitical risk or turmoil in financial markets. The Bank strives for appropriate liquidity risk management through diversification of funding methods and monitoring of liquidity risk indicators, but it may be difficult to respond to sudden changes in the funding environment.

There is a risk of customer information leakage or suspension of payment functions due to increasingly sophisticated and advanced cyber attacks such as ransomware and targeted attacks, as well as a risk of delayed recovery and additional costs arising from system failures caused by outsourced vendors. An increase in fraudulent use or unauthorized transfers, or leakage of confidential information, could result not only in direct losses but also in reputational damage and customer attrition. The Bank has established backup functions and formulated contingency plans, but there are limits to its ability to respond to large-scale disruptions beyond what is anticipated.

Against the backdrop of a declining number of new graduates due to the falling birthrate and an increasingly active job-change market, competition for hiring is intensifying not only among financial institutions but also with other industries, creating a risk that it will become difficult to secure specialized personnel in strategic and core areas. An increase in retirements among mid-career and veteran staff could lead to a decline in the level of internal control and risk management systems, potentially placing greater constraints on business operations. In addition, a shortage of specialized personnel needed to plan, promote, and manage overseas operations could lead to a decline in competitiveness and delays in strategy execution.

There is a risk of direct losses and reputational damage arising from legal violations or inappropriate conduct that deviates from social norms by officers and employees of the Bank Group and its outsourcing partners. If the response to strengthened domestic and international regulations related to AML/CFT and economic sanctions is insufficient, the Bank could be subject to administrative sanctions (such as business improvement orders or business suspension orders) or claims for damages. The Bank has centralized legal risk management across the group and is working to enhance its compliance framework, but there is no guarantee that its response to changes in the regulatory environment will always be sufficient.

If the introduction of advanced technologies such as generative AI is delayed, risks such as a decline in competitiveness relative to other banks, reduced customer satisfaction, and delayed detection of financial crime or risk management issues will increase. Intensified competition from new entrants from other industries driven by technological innovation could reduce the advantage of the Bank Group's value co-creation strategy. The Bank is working on the introduction of next-generation finance and advanced technologies such as generative AI, strengthening security measures, and securing digital specialists, but the risk of a delayed response to rapid technological change continues to exist.

Amid the tightening of laws and regulations related to environmental and social issues including climate change, there is a risk that a decline in competitiveness and reputational damage could occur if the response of the Bank Group and its investees/borrowers is deemed insufficient. Deterioration in the business conditions of investees/borrowers with inadequate responses to environmental and social issues could also directly lead to an increase in credit-related expenses. The Bank identifies environmental and social risk as a material risk under its integrated risk management framework and continuously works to strengthen early-warning management and response capabilities.

There is a risk that required regulatory capital will increase due to the application of the finalized Basel III regulations or deterioration in the creditworthiness of obligors under the internal ratings-based approach, leading to a decline in the capital adequacy ratio (which domestic standard banks are required to maintain at 4.0% or above). A decline in capital buffers and an increase in risk assets accompanying the expansion of investments and loans could make it impossible to take risk as planned, or could force a change in strategy. The Bank continuously seeks to improve the quantity and quality of its capital while maintaining a monitoring framework for the leverage ratio, liquidity regulations, and other metrics.

SBI Holdings, Inc., the Bank's parent company, may exert significant influence over resolutions at the Bank's general shareholders' meetings, creating a risk that decisions on matters such as the election of officers, organizational restructuring, or amendments to the articles of incorporation could conflict with the interests of minority shareholders. In addition, as the SBI Group develops and expands diverse businesses around the world, the Bank Group may find itself in competition with other companies within the group in pursuing investment opportunities. The Bank has established a nomination and compensation committee with a majority of outside directors and a deliberation framework through a specified transactions review committee for conflict-of-interest transactions, striving to ensure independence.