The Kiyo Bank, Ltd.

The Group's main business base is concentrated in Wakayama Prefecture and Osaka Prefecture, with both loans and deposits having a high proportion attributable to small and medium-sized enterprises, individuals, and local public bodies. If economic conditions in these regions deteriorate, loan amounts, deposit volumes, credit-related expenses and other factors may fluctuate, potentially having an adverse effect on business performance. The high degree of dependence on the regional economy is a structural issue that constrains risk diversification.

Deterioration in regional economic and land price trends, or in the financial condition of borrower companies, may increase the balance of non-performing loans and expand credit-related expenses. The allowance for loan losses is recorded based on historical loan loss experience of borrowers, but there is a risk that actual loan losses may exceed estimates due to a sudden change in economic conditions or the bankruptcy of a major borrower. A decline in collateral value or unexpected events requiring additional provisioning could also affect business performance and financial condition.

The Group holds a bond portfolio centered on domestic and foreign government bonds, and an unexpected rise in interest rates could result in price fluctuation losses. There is also a risk that mismatches in the interest rate revision periods of financial assets and liabilities could cause interest rate fluctuations to adversely affect periodic earnings. Although risk limitation and hedging transactions are used for control, complete avoidance is difficult.

The Group holds domestic stocks, investment trusts and other securities for the purpose of strengthening relationships with business partners and for investment purposes, and a decline in stock prices and other values could result in valuation losses or losses on sale, adversely affecting business performance. Much of the held stock consists of cross-shareholdings, which makes it difficult to respond flexibly to changes in market conditions.

The Group is obligated to maintain consolidated and non-consolidated capital adequacy ratios based on domestic standards under the Banking Act, and if the ratios fall below the required standards, it will receive guidance or orders from supervisory authorities. The ratios could decline due to the occurrence of a net loss, an increase in the loan balance, expanded risk-taking in market investment, changes in the calculation standards for capital adequacy ratios, and other factors. Although the ratios currently substantially exceed the required standards, this is recognized as a risk in the event that multiple factors coincide.

The Group's main business area is a region where the occurrence of the Tonankai and Nankai earthquakes and a Nankai Trough megaquake is a concern, and a large-scale earthquake disaster or other natural disaster could adversely affect business operations and performance. There is also a risk that heavy rain, typhoons, river flooding and other events associated with climate change could damage business locations or deteriorate the financial condition of business partners. In addition, there are concerns that indirect credit risk could materialize through the deterioration of asset value and financial condition of business partners resulting from tightening environmental regulations or technological shifts.

Computer system outages, malfunctions, unauthorized use, or cyberattacks from outside parties could adversely affect business operations and performance. As a financial institution, the Group has a high degree of dependence on its systems, and the impact on customers and the risk of loss of credibility in the event of a system failure are significant. Disruption to entrusted business operations at outsourcing partners, and the leakage or loss of important information there, also pose a similar risk.

The Group holds a large amount of important information, including customers' personal information, and if this information is leaked externally, it could lead to a decline or loss of credibility as well as an adverse effect on business operations and performance. Information management issues at outsourcing partners constitute a similar risk factor. Although the Group is working to strengthen its compliance framework, complete prevention is difficult.

Competition is intensifying with other financial institutions, including major financial institutions, in the small and medium-sized enterprise and individual markets that the Group is focusing on, creating a risk of declining profitability. The Group aims to maintain its competitive advantage through the introduction of new products and services and detailed customer service, but if these efforts do not succeed, profitability could decline. The entry of new competitors such as fintech companies could also be a factor further intensifying the competitive environment.

The Group works to prevent money laundering, terrorist financing, proliferation financing, and violations of economic sanctions measures based on a risk-based approach, but if it fails to prevent fraudulent transactions in advance, this could result in unexpected losses or loss of credibility, adversely affecting business operations and performance. Amid the trend of tightening international regulation, the increasing cost of developing and maintaining the necessary framework also remains an ongoing challenge.