The Miyazaki Bank,Ltd.

As the Bank's main operating base is centered in Miyazaki Prefecture, there is a risk that fluctuations in local economic conditions, real estate prices, and stock prices could deteriorate the financial condition of borrowers, leading to an increase in non-performing loans. In the event of large-scale earthquakes, typhoons, or other natural disasters, deterioration of loan assets could occur concentratedly, potentially resulting in substantial provisions for loan losses or write-offs and leading to a decrease in capital. The Bank responds through provisioning for allowance for loan losses and sale of receivables, but a regional concentration risk is inherent.

The Bank invests in securities such as bonds and stocks, and there is a risk that a decline in the value of government bonds and other instruments due to rising interest rates, valuation losses on equities due to falling stock prices, and losses on unhedged foreign currency-denominated securities due to yen appreciation could occur. Such fluctuations could lead to deteriorating business performance and a decline in the capital adequacy ratio. The Bank manages market risk through the setting of risk limits and measurement using VaR, among other methods.

Depending on the speed and degree of changes in market interest rates, net interest income may deteriorate due to time lags in the revision of deposit and lending rates and differences in interest rate sensitivity between assets and liabilities. In particular, during periods of rapid interest rate fluctuation, the gap between funding costs and investment yields may widen, putting pressure on earnings. The Bank monitors interest rate risk in accordance with its basic risk management policy.

If the ratio falls below the domestic standard (4%), there is a risk that the Bank could be ordered to suspend all or part of its operations under prompt corrective action measures. Factors that could contribute to a deterioration in the ratio include an increase in credit-related expenses, a decline in the value of the securities portfolio, and changes in the standards for calculating the capital adequacy ratio. In addition, if the recoverability of deferred tax assets declines, the capital adequacy ratio could also decline, potentially adversely affecting business performance.

Increasingly sophisticated and elaborate cyberattacks, unauthorized access, and computer virus infections pose a risk of information leaks and system malfunction or shutdown. In addition to the burden of damages compensation associated with business suspension, administrative sanctions, and response costs, leakage of customer information could lead to violations of the Personal Information Protection Act and loss of trust. The Bank implements cybersecurity measures and manages outsourcing contractors, but complete protection remains difficult to achieve.

External factors such as wind and flood damage, earthquakes, and pandemics, as well as internal factors such as equipment failures, human error, and power outages, pose a risk of business process suspension or information leaks. If systems that form the core of banking operations were to stop, this could develop into widespread reputational damage and compensation issues, potentially having a serious adverse effect on management. The Bank implements various risk countermeasures and manages outsourcing contractors, but a variety of causal factors exist.

There is a risk that natural disasters—such as increasingly large typhoons in recent years, eruptions of the Kirishima volcanic range, and earthquakes centered off Hyuganada—could make it difficult to continue all or part of operations. Because the Bank's operating base is concentrated in Miyazaki Prefecture, a large-scale disaster could have a wide-ranging impact on business performance and financial condition. The Bank implements building seismic reinforcement and wind/flood damage countermeasures, but risks inherent to the region's characteristics remain.

Progress in financial deregulation, expansion of personal lending and investment trust operations by other financial institutions, and strengthened operations within the prefecture by megabanks and others could threaten the Bank's competitive advantage and adversely affect its business performance and financial condition. In addition, as the Bank expands its scope of business into insurance and securities operations, there is also a risk of litigation and loss of trust due to violations of the suitability principle or inappropriate product explanations. The Bank addresses this through enhanced education and training, but adapting to changes in the competitive environment remains an ongoing challenge.

Strategies to strengthen earning power—such as increasing lending to high-quality borrowers, expanding the interest margin on existing loans, increasing fee income, and reducing expenses—may not proceed as expected. If the effectiveness of these strategies is limited due to changes in the competitive environment or system costs exceeding expectations, there is a risk that business performance targets will not be achieved. The Bank examines the risks of new business and new products in accordance with its basic risk management policy.

There is a risk that deterioration in financial condition or other factors could make it impossible to secure necessary funds, or could force the Bank to raise funds at markedly higher interest rates. In addition, during periods of market turmoil, the Bank could be forced to trade at prices markedly less favorable than usual, resulting in losses. The Bank manages liquidity risk by setting risk limits based on the funding gap in its business plan or the amount of external debt financing.