Aozora Bank, Ltd.

Deterioration in the performance of investment and loan counterparties or in the real estate market conditions—caused by rising crude oil prices and accelerating inflation due to worsening conditions in the Middle East, policy changes under the current U.S. administration, and fluctuations in financial markets—may lead to an increase in non-performing loan balances and credit-related costs. There is also concentration risk in specific counterparties and industries: the top 10 large debtors accounted for approximately 19% of the loan balance as of the end of March 2026, and real estate non-recourse loans accounted for approximately 15% of total loans. As countermeasures, the Bank complies with lending and investment management policies, has established guidelines to avoid credit concentration risk, and implements capital control including stress testing.

Intensifying competition for deposits amid population decline and rising interest rates, deterioration in the foreign currency funding environment due to geopolitical risks such as the situation in the Middle East, and rapid deposit outflows caused by the spread of rumors via social media may worsen the Bank's cash flow. Because deposits can be easily terminated and transferred via internet banking, the risk of deposit outflows exceeding expected scale and speed is particularly high. The Bank manages early warning through diverse indicators, conducts liquidity stress tests, and has established emergency foreign currency funding facilities, but liquidity risk cannot be completely avoided.

Fluctuations in interest rates, foreign exchange rates, stock prices, and credit spreads may worsen valuation gains/losses on held securities and adversely affect net interest income. If significant interest rate fluctuations occur due to continued rate hikes by the Bank of Japan or policy changes by central banks in other countries, this could lead to a decline in the value of the bond portfolio, reduced loan demand, and an increase in non-performing loans through deterioration in debtors' business performance. The Bank addresses this through efficient portfolio construction diversified across interest rate, equity, and credit exposures, and interest rate risk reduction operations utilizing derivatives and bear funds, but reducing positions may become difficult under stressed conditions.

Cyber attacks pose a risk of reducing corporate value through the suspension of banking operations, damage to customer assets, and information leaks. The threat is undergoing a qualitative change, as the malicious use of rapidly advancing frontier AI has significantly shortened the period between vulnerability discovery and attack. The Bank implements multi-layered technical measures (entry and exit countermeasures), TLPT (threat-led penetration testing), and third-party evaluations based on the CRI Profile, but there is a possibility that the measures taken against increasingly sophisticated cyber attacks may not function effectively. Cyber attacks are recognized as the top risk for FY2026 (ending March 2026), and the Bank continues to improve knowledge among all officers and employees and conduct incident response training.

Outsourcing of critical systems (third-party dependency), including the core banking system BeSTAcloud, as well as human error during system changes or migrations, may result in serious system failures leading to damage to customer assets or business suspension. The Bank has established dual data centers (a remote two-center system in Nagoya and Fukuoka) and contingency plans, but the risk remains that both the main and backup centers could be affected in the event of an earthquake in the Tokyo metropolitan area. The risk of information leaks or service suspension due to attacks on third parties is also increasing, and the Bank is working to strengthen its management framework for outsourced vendors.

Inadequate measures against financial crimes such as money laundering, special fraud, and unauthorized account use may damage customer assets, leading to administrative sanctions and a decline in corporate value. In addition, inadequate response to economic sanctions under the Foreign Exchange and Foreign Trade Act, or the manifestation of conduct risk (conduct that goes against customer-oriented business operations), may result in administrative sanctions, litigation, or reputational damage. The Bank is advancing the sophistication of its monitoring framework, ensuring the effectiveness of measures through numerical target setting, and collaborating with regulators and external experts, but fraud cannot necessarily be completely prevented despite strict checks.

Overseas loans accounted for approximately 29% of total loans as of the end of March 2026, of which loans to North America were concentrated at approximately 86%. The materialization of geopolitical risk, policy changes under the current U.S. administration, and deterioration in the foreign currency funding environment may lead to increased credit costs and business deterioration. For non-recourse loans backed by U.S. office properties, where market conditions have remained sluggish since the COVID-19 pandemic, allowances for loan losses have already been recorded, but there remains a risk of additional losses due to delayed recovery in the real estate market. The Bank controls exposure through country/region-specific guidelines and agile receivables sales, but funding risk also exists when foreign currency funding becomes difficult.

Intensifying competition from major domestic bank groups, investment banks, internet banks, and new entrants from other industries may pressure profitability through declining loan interest rates, rising deposit interest rates, and reduced fee income. In the retail customer business, the small number of branches, later entry into internet banking, and a relatively small customer base act as barriers to acquiring new customers, creating a risk that diversification of funding sources cannot be sufficiently achieved. The Bank's "strategic partner" relationships with regional financial institutions may also lose competitiveness due to changes in the financial environment or a decline in the Bank's creditworthiness, potentially affecting both revenue and funding.

A shortage or attrition of personnel who can adapt to changes in the business environment, or who possess the skill sets required for focus businesses such as the investment banking field, poses a risk of hindering sustainable growth through business operations and the realization of business strategy. The Bank continues strategic personnel transfers, enhanced external recruitment, and initiatives to improve employee engagement, but securing the necessary personnel may fall short of expectations. The risk is also recognized that the departure of key management personnel could reduce the ability to execute business operations and business strategy.

Both policy and regulatory changes accompanying the transition to a decarbonized economy (transition risk) and the increasing frequency and scale of natural disasters due to climate change (physical risk) may adversely affect business performance and financial condition through deterioration in the quality of the credit portfolio and damage to the Bank Group's business facilities and employees. The Bank has established its "Investment and Loan Policy with Consideration for the Environment and Society," adopted the Equator Principles, expanded information disclosure in line with TCFD, and promoted sustainable finance, but if its response to strengthened disclosure regulations or shifts in national policies is deemed insufficient, this could lead to reputational decline and lost business opportunities.