The Shikoku Bank, Ltd.

The risk that non-performing loans and credit-related expenses increase due to deterioration in the financial condition of borrowers or fluctuations in economic conditions, real estate prices, and stock prices. There is also a possibility that the allowance for doubtful accounts becomes insufficient or that additional provisions become necessary due to a decline in collateral value. Risk management is implemented through ensuring the independence of the screening department and regular reporting to the ALM Committee, and this is recognized as a particularly important risk.

The risk that net interest income shrinks due to interest rate fluctuations, and the risk that the market prices of held bonds (government bonds, municipal bonds, etc.) decline, in addition to the risk of impairment or valuation losses arising from declines in the prices of held stocks, investment trusts, and other assets. Amid mismatches in maturity and amount between funding and investment, the impact on the bond portfolio is of particular concern during periods of rising interest rates. Efforts are made to prevent the expansion of losses through the establishment of a risk management oversight department independent of front-office departments and daily monitoring, and this is recognized as a particularly important risk.

The risk that increasingly sophisticated and elaborate cyberattacks, such as computer viruses, unauthorized access, and ransomware, cause system outages, data destruction or tampering, and leakage of customer information and confidential information. Security management across the entire supply chain, including outsourcing partners, is also an issue. Efforts are made to ensure governance through the development of a response framework centered on the in-house CSIRT, regular practical drills, and periodic reporting to the Board of Directors.

The risk that a deterioration in the regional economy directly affects the Bank Group's business performance and financial condition, given that the Bank Group's main business base is the Shikoku region, centered on Kochi Prefecture. Due to this concentration of business in the region, the structure is such that the Bank Group is more susceptible to region-specific economic downturns than to nationwide economic deterioration. Efforts are being made to mitigate the impact through diversification of the regional economy and diversification of client industries.

The risk that the occurrence of a Nankai Trough earthquake, which is anticipated in Kochi Prefecture, the Bank's main business base, as well as natural disasters such as concentrated heavy rainfall and infrastructure failures, affect business operations and performance. Coupled with the intensification and increased frequency of natural disasters associated with climate change, there are also concerns about the spillover into credit risk through damage to collateral assets and deterioration in the management of borrowers. Efforts are being made to develop a critical business continuity framework, but there is a possibility that response will be difficult if events exceeding expectations occur.

There exists both transition risk, in which stricter regulations and technological innovation aimed at the transition to a decarbonized society affect the business and performance of borrowers, and physical risk, in which natural disasters and abnormal weather cause deterioration in the management of borrowers, damage to collateral assets, and damage to business branches. In particular, there are concerns about the manifestation of physical risk in the business base centered on Kochi Prefecture. Climate change-related risk is explicitly recognized as a risk that affects business performance, and the development of a management framework is being advanced.

The risk that mismatches in maturity between fund investment and fund procurement, or unexpected outflows of funds, disrupt cash flow management or force procurement at significantly higher interest rates. If a credit rating downgrade occurs, capital and fund procurement in the market may become difficult, potentially leading to increased procurement costs. Preparations for unforeseen circumstances are made through appropriate assessment of market liquidity, stable cash flow management, and the implementation of simulated drills according to the degree of funding tightness.

The risk that, given the use of various information systems for financial services such as deposits, loans, and remittances, a serious system failure caused by defects during new development or updates, hardware failures, or large-scale disasters affects credit standing and business performance. Efforts are being made to build redundant communication lines and backup systems, and to ensure thorough testing and quality control during new development and updates. Some systems are also connected to external networks, and the scope of impact in the event of a failure could be extensive.

The risk that failure to comply with the diverse laws and regulations applicable to banking business affects credit standing, business operations, and performance. With respect to anti-money laundering and counter-terrorist financing measures as well, failure to prevent unfair or improper transactions such as unauthorized remittances in advance would result in an impact on credit standing, performance, and business operations. Compliance is positioned as an important management issue, and efforts are being made to build a management framework based on a risk-based approach grounded in the concept of the three lines of defense.

The risk that, in addition to the progress of financial deregulation, competition is further intensifying due to the entry of companies from other industries into the financial sector, thereby affecting the Bank Group's business performance and financial condition. The entry of fintech companies and major digital platform providers may erode the revenue base of traditional banking operations. While the Bank Group aims to enhance corporate value through the implementation of business strategies based on its medium-term management plan, there is also a risk that the strategies may not achieve the initially expected results.