The Musashino Bank, Ltd.

The Bank, whose principal business base is Saitama Prefecture, faces the risk that non-performing loans and credit-related expenses may increase due to domestic and overseas economic conditions, real estate price movements, stock price fluctuations, and the business conditions of counterparties. The allowance for loan losses is calculated using the DCF method, cash flow deduction method, and other approaches; however, unforeseen events such as a deterioration in economic conditions or a decline in collateral real estate prices may necessitate additional provisions. Risk is managed through a capital allocation system utilizing VaR and stress testing, but if the risk materializes, it could have a material impact on capital and earnings plans.

The Bank's earnings base is heavily dependent on the economy of Saitama Prefecture, and if the regional economy deteriorates more than expected, it may become difficult to maintain or expand the earnings base. As deterioration of the regional economy directly leads to an increase in credit risk, its impact on business performance and financial condition could compound and expand. The Bank seeks to mitigate this risk by focusing on supporting the promotion and revitalization of the regional economy, but geographic concentration risk remains a structural issue.

The Bank holds marketable securities and other assets, and a significant decline in market conditions could result in impairment or valuation losses that affect business performance and financial condition. While the Bank conducts investment operations with close attention to market trends, it endeavors to grasp potential losses by managing risk volume using VaR at a 99% confidence interval and conducting periodic stress tests. A decline in the market value of securities can also be a factor in the reduction of the capital adequacy ratio.

There is a risk that a decline in earnings or a loss may occur due to interest rate fluctuations (including those caused by the negative interest rate policy) arising from the mismatch in the timing of interest rate resets between assets and liabilities (ALM gap). Changes in the interest rate environment can also affect unfunded pension obligations, potentially causing broad-ranging impacts on financial condition. The Bank addresses this through risk volume management using VaR and a capital allocation system, but rapid interest rate fluctuations may result in unexpected losses.

The Bank is required to maintain a consolidated and non-consolidated capital adequacy ratio of 4% or higher based on domestic standards, and if it falls below this level, the Bank may receive an order from the Commissioner of the Financial Services Agency, including suspension of all or part of its business operations. Major factors affecting the capital adequacy ratio include a decline in borrowers' creditworthiness due to deteriorating economic conditions, impairment associated with declines in the market value of securities, and changes to the capital adequacy ratio standards or calculation methods. A reduction in deferred tax assets or impairment of fixed assets could also lead to a decline in the capital adequacy ratio.

If computer system downtime or malfunction, unauthorized use, or information leakage or falsification due to cyber attacks occurs, business performance and financial condition may be affected due to a loss of public confidence. Similar risks may also arise in the event of a system failure or information leakage at an outsourced service provider (third party). While the Bank is continuously strengthening its security in response to the diversification and sophistication of financial crime, the increase in associated countermeasure costs could also affect business performance.

Transition risks arising from climate change (such as increased regulation associated with the transition to a decarbonized society) and physical risks (such as damage to counterparties' collateral properties or business disruption due to natural disasters such as flooding) may increase counterparties' credit-related expenses and affect business performance and financial condition. The Bank announced its support for the TCFD recommendations in September 2021 and is progressively advancing disclosure across the four categories of governance, strategy, risk management, and metrics and targets. Insufficient disclosure of sustainability information, including climate change, could also lead to impairment of corporate value and adverse effects on business continuity.

The Bank plans to launch its new medium-term management plan "MCP 2/3" (April 2026 to March 2030) starting in April 2026, but changes in the business environment, such as a deterioration in the economy or corporate earnings or intensifying competition, may prevent the strategy from producing the expected results. Amid continuing intensification of competition due to deregulation of the financial system, failure to establish a competitive advantage could affect business operations, performance, and financial condition. Failure of the strategy directly leads to shortfalls in the earnings plan and poses a risk of impeding medium- to long-term corporate value enhancement.

The Bank positions the prevention of money laundering, terrorist financing, proliferation financing, and violations of economic sanctions as an important management strategy issue and implements risk-commensurate mitigation measures; however, if it fails to prevent unfair or improper transactions, this could lead to unexpected losses or loss of credibility, affecting business performance and financial condition. Amid the trend of tightening international regulation, continuous costs are incurred in building and maintaining an effective management framework. If a regulatory violation is discovered, this could give rise to significant risks such as administrative sanctions.

Problems related to personnel treatment and work management, unfair conduct such as harassment, and employer liability arising from unlawful acts by officers and employees may affect business performance and financial condition. In addition, risks are identified whereby competitiveness and productivity could decline due to insufficient quality or quantity of human resources, inappropriate skill matching, declining employee motivation and engagement, lack of diversity, and inadequate talent development. In the financial industry, where digitalization and competition are intensifying, securing and developing human talent is the foundation for sustainable growth, and its deterioration could lead to a decline in earning power over the medium to long term.