The Awa Bank, Ltd.

The risk that the amount of non-performing loans and credit costs will increase due to changes in economic conditions or deterioration in the business condition of borrowers. As the business model is centered on transactions with small and medium-sized enterprises, it is susceptible to the effects of price increases, rising labor costs, crude oil price surges stemming from Middle East tensions, and exchange rate fluctuations. The Bank addresses this through the establishment of a credit risk management policy, avoidance of concentrated credit exposure, regular reporting of large exposure borrowers (credit amount of ¥500 million or more) to the ALM Committee, and the establishment of a framework for early business improvement support.

The risk that fluctuations in interest rates, exchange rates, and stock prices will lead to a contraction in net interest income or impairment/valuation losses on held securities. Uncertainty about the outlook has increased amid concerns over a global economic slowdown due to escalating tensions in the Middle East. The Bank addresses this through integrated management using the VaR method and a capital allocation system, along with detailed risk management and stress testing conducted through the ALM Committee.

The risk that a mismatch in the timing of fund-raising and fund management, or an unexpected outflow of funds, will make it difficult to secure necessary funds or force the Bank to raise funds at significantly higher interest rates. The impact is recognized as significant should this risk materialize. The Bank addresses this by maintaining asset soundness, conducting fund-flow analysis with a margin of safety, and preformulating crisis management measures for times of tight liquidity.

As a transition risk, the increase in credit costs associated with the deterioration in earnings of borrowers (in the electric power, marine transport, and land transport sectors) due to stricter decarbonization regulations is estimated at up to approximately ¥4.2 billion. As a physical risk, the increase in credit costs associated with damage to collateral real estate from flooding, etc., or damage suffered by business partners, is estimated at up to approximately ¥4.8 billion. The Bank conducts financial impact analysis based on the IEA's Net Zero Emissions by 2050 scenario and the IPCC's RCP8.5 scenario (4°C scenario), and addresses this through BCP development and the establishment of two head office locations.

Tokushima Prefecture, the Bank's main business base, is expected to experience a Nankai Trough mega-earthquake, which could cause severe damage to officers and employees, branch facilities, and business partners. An increase in non-performing loans and partial suspension of operations due to the deterioration of the regional economy could have a material impact on business performance. The Bank addresses this through the development of a business continuity plan and disaster response drills, decentralization of head office functions into two locations, establishment of a backup center outside Tokushima Prefecture, and the establishment of a mutual support framework with the participating banks of the Shikoku Alliance (The Hyakujushi Bank, The Iyo Bank, and The Shikoku Bank).

The risk that, if economic activity stagnates due to a pandemic such as COVID-19, unstable financial markets and reduced business activity will lead to deteriorated earnings, and worsening economic conditions will lead to increased credit costs. Human damage from infection among officers and employees could also affect business continuity. The Bank addresses this through the formulation and execution of its management plan, productivity improvements through structural reform, establishment of holiday consultation windows, fund-flow support utilizing various government loan programs, and ongoing review of infection prevention rules.

The risk that inappropriate sales of financial products, etc., could lead to administrative sanctions such as partial business suspension or a loss of trust, adversely affecting business performance. With the legal codification of the "obligation to consider the best interests of customers" under the revised Financial Instruments and Exchange Act, strengthening the framework is also required from a legal compliance perspective. The Bank has established its "Policy on Customer-Oriented Business Conduct" and is working to strengthen its framework through monitoring of six policy initiatives (pursuit of best interests, conflict-of-interest management, fee transparency, etc.).

The risk that a suspension or malfunction of computer systems, or information leakage or tampering caused by a cyberattack, could cause significant inconvenience to customers and damage the credibility of the Bank Group. Dependence on systems is increasing as operations become more diversified and complex. The Bank addresses this through the formulation of contingency plans, redundancy of equipment and communication lines, establishment of a security policy, and the establishment of a cyberattack response body (AWA-CSIRT).

The risk that unfairness or inequity in personnel management, deterioration of the working environment, and insufficient opportunities for talent development could make it difficult to secure and retain the human resources necessary to practice the Bank's traditional business policy of "Eitai Torihiki" (long-term relationship banking), leading to stagnation or delays in business operations. Human capital is positioned as the most important element in the Bank's business operations. The Bank addresses this through compliance training, fair and equitable personnel evaluations, work-style reform and improved treatment of employees, improving employee satisfaction through engagement surveys and dialogue, and strengthening its career support framework.

The risk that the shrinking of the regional economy due to deterioration of the economy or population decline in Tokushima Prefecture, the Bank's main business base, will lead to deteriorated earnings and deposit outflows due to a decline in deposits and loans. Intensifying competition that transcends industry boundaries and changes in the market environment are also factors that could reduce profitability. The Bank addresses this through community-based business measures, improving profitability by leveraging its regional branch network, and initiatives to promote regional revitalization.