The Nanto Bank, Ltd.

If the financial condition of borrowers deteriorates due to domestic and overseas economic trends or fluctuations in land prices, stock prices, or foreign exchange rates, there is a risk that non-performing loans and credit-related expenses may increase. In addition, actual credit losses could significantly exceed expected loss amounts, potentially requiring additional provisions to the allowance for loan losses. Difficulty in liquidating collateral real estate or securities due to price declines could also lead to increased credit-related expenses.

Given the maturity mismatch between fund management in loans and securities and fund procurement through deposits, unexpected interest rate fluctuations could result in decreased interest income and valuation or sale losses on bonds. Although the Bank comprehensively manages interest rate risk, there is a possibility that management by the ALM Committee may not be able to fully address sudden changes in market conditions.

Unexpected fluctuations in the prices of securities such as stocks and bonds may result in valuation or sale losses. Since a considerable portion of the Bank Group's assets consists of securities, sudden market changes may adversely affect its financial position and operating results. Although risk amounts are managed to remain within the scope of risk capital, limit management may not function effectively during extreme market fluctuations.

Maturity mismatches between fund management and procurement, or unexpected fund outflows, may make it difficult to secure necessary funds or force procurement at significantly higher interest rates. In addition, during market turmoil, it may become difficult to sell held securities, forcing transactions at unfavorable prices. These factors could increase procurement costs and generate losses, adversely affecting financial position and operating results.

In addition to system failures such as computer system downtime or malfunction, there is a risk of incurring losses due to cyberattacks such as unauthorized intrusion, information theft, data tampering, and execution of malicious programs. Although the Bank is strengthening security measures and conducting cyberattack exercises centered on its CSIRT, complete defense is difficult given the increasing sophistication of attack methods. If a system failure or cyberattack materializes, it could have a significant adverse effect on financial position and operating results through business suspension, information leakage, and loss of credibility.

Both physical risks (damage to customers' and the Bank Group's assets and business infrastructure due to natural disasters, sea level rise, etc.) and transition risks (impact on customers' business and financial condition due to stricter regulations, technological innovation, and market changes toward decarbonization) could lead to increased credit costs. In addition, if the response to and disclosure of climate change risk are deemed insufficient, there is a risk that corporate value could be impaired. The Bank Group has expressed support for the TCFD recommendations and is advancing disclosure in each of the categories of governance, strategy, risk management, and metrics and targets.

The Bank Group operates branches primarily centered on Nara Prefecture, and its business area is limited. Furthermore, the local economy of Nara Prefecture is small in scale and has a tendency to depend on specific industries. In addition to the impact of the macro economy, a deterioration in the regional economy could directly and adversely affect the Bank Group's financial position and operating results. Regional concentration risk is difficult to diversify, and if the structural contraction of the regional economy continues, it could lead to a weakening of the medium- to long-term revenue base.

With the advancement of digital technology, entry into the banking business by companies from other industries and the expansion of new financial services such as digital wage payments are increasing, and securing excellent digital talent and the enormous cost of system development may put pressure on business performance. If cyberattack risks associated with the advancement of digitalization, large-scale information leaks, or long-term service outages occur, the credibility of the Bank as a financial institution could be undermined, potentially also causing disruptions to fund liquidity. The Bank Group has traditionally worked to improve services utilizing digital technology, but maintaining differentiation from competitors remains a challenge.

Since the Bank does not have overseas business locations, it is required to maintain a capital adequacy ratio of 4% or more on both a consolidated and non-consolidated basis, and if this ratio falls below the required level, the Bank may be ordered to suspend all or part of its operations. An increase in credit-related expenses or changes in the capital adequacy ratio standards or calculation methods could adversely affect the capital adequacy ratio. The Bank Group strives to maintain a certain level of capital and improve its quality, but the risk could materialize if there is a delay in responding to sudden changes in market conditions or regulatory changes.

Financial crimes such as SNS-based investment fraud, romance scams, and cybercrime are becoming increasingly complex and sophisticated year by year, and if the Bank's financial services are misused, this could result in additional costs, unexpected losses, and a decline in social credibility. In addition, if the Bank violates domestic or overseas laws and regulations regarding anti-money laundering and countering the financing of terrorism, it could face substantial fines or a loss of credibility due to reputational damage, adversely affecting its financial position and operating results. The Bank works with police authorities and others to strengthen security, while also establishing an AML/CFT framework based on a risk-based approach.