Bank of The Ryukyus, Limited

The Bank Group operates primarily in Okinawa Prefecture, and since approximately 60% of its loan portfolio consists of housing loans and loans to the rental housing and real estate industries, its business performance is susceptible to trends in the real estate market and the number of inbound tourists. Okinawa Prefecture's economy is centered on tourism-related industries, and combined with the island region's characteristic vulnerability to rising energy prices and increased logistics costs, deterioration in the financial condition of business partners could lead to an increase in non-performing loans and a rise in credit-related expenses. As a countermeasure, the Bank introduced a forward-looking provisioning method from FY2021 (ending March 2021), and conducts regular monitoring of housing loans and loans to the real estate industry along with screening that emphasizes LTV and DSCR.

The Bank Group holds approximately ¥624.8 billion in yen-denominated bonds (approximately 80% Japanese government bonds, approximately 20% municipal bonds, with a duration of approximately 3.0 years) and approximately ¥21.7 billion in foreign currency-denominated bonds (duration of approximately 5.4 years). A significant rise in market interest rates due to changes in domestic and overseas monetary policy could result in valuation losses, and there is also a possibility of negative spread occurring where funding costs exceed investment returns. Since bonds account for over 80% of the securities portfolio, interest rate sensitivity is high. The risk management department measures risk volume using VaR and allocates capital, and has established a system to track profit and loss on a daily basis in coordination with the market department.

The Bank Group holds assets subject to price fluctuation risk, such as equities and investment trusts, amounting to approximately 9% (approximately ¥67.4 billion) of its total securities holdings, including investment trusts that invest in domestic and overseas equities, real estate, and bonds. A significant decline in stock markets or a rise in interest rates could result in valuation losses that affect business performance. Strategic shareholdings with market value comprise 10 issues worth approximately ¥2.6 billion. The Bank endeavors to limit the expansion of valuation losses by setting monitoring lines and decline alarm points.

If the Bank Group's business performance, financial condition, or credit ratings deteriorate, or if market conditions change significantly, there is a risk that securing necessary funds could become difficult, forcing the Bank Group to raise funds at markedly higher interest rates. In light of the spread of internet banking and similar services, the Bank continues to consider more sophisticated liquidity risk management, including setting risk limits that account for the risk of deposit outflows via digital channels. Currently, the Bank's long-term issuer ratings from both R&I and JCR are

The Bank Group faces risks of system outages, information leaks, and data tampering caused by cyberattacks or unauthorized access, which could adversely affect business performance and financial condition through the suspension of settlement functions and loss of social credibility. Risks related to inappropriate output results and business processing errors associated with the introduction of advanced technologies such as AI have also been newly recognized. The Bank conducts collaboration with external organizations, training, and vulnerability countermeasures through its CSIRT (Cybersecurity Working Group), but complete protection cannot be guaranteed.

If unauthorized fund transfers occur via internet banking or the Ryugin app, or if card number leaks or fraudulent transactions occur due to external attacks such as credit master attacks, this could lead to loss of credibility and deterioration in business performance for the Bank Group. The Bank addresses these risks through the introduction of one-time passwords and risk-based authentication, collaboration with international card brands, police, and external cooperating organizations, and enhanced precision in transaction monitoring, but it is difficult to completely eliminate such risks.

As financial crimes become more diverse and sophisticated, the standards required by domestic and overseas regulatory authorities for anti-money laundering and counter-terrorist financing measures are rapidly rising. Insufficient framework development could result in administrative sanctions such as business suspension or fines, as well as loss of credibility. In response to AML/CFT guidelines, the Bank Group has tightened screening for corporate account openings and conducts regular reviews of customer transaction status, while also working to gather information and skills through the TSUBASA Alliance.

In addition to the risk that business continuity could become difficult due to natural disasters such as intensifying typhoons or large-scale earthquakes, transition risks associated with climate change (changes in policy, law, markets, reputation, and technology) and physical risks (direct damage to assets, supply chain disruption) could affect the Bank Group's business performance and financial condition. The Bank Group supports the TCFD recommendations and is working to expand its disclosure of climate-related financial information, but even so, if disclosure is deemed insufficient, this could affect business operations. The Bank has established contingency plans and various response manuals, and works to improve their effectiveness through disaster response training.

If geopolitical risks such as military conflict were to arise in and around Okinawa Prefecture, where the Bank Group is based, this could affect the Bank Group's business performance and financial condition in ways beyond the Bank Group's control. Due to the geographic characteristics of Okinawa Prefecture, this risk holds unique significance compared to other domestic regions. The Bank is working to explicitly document employee evacuation and business continuity response measures in its operational procedures in the event of an emergency.

The Bank Group outsources system operation and maintenance, as well as various business operations, to service providers both within and outside the Group. If a significant system failure, legal violation, information leak, or other incident occurs at one of these service providers, it could affect the Bank Group's business performance and financial condition through loss of credibility and disruption to business operations. The Bank conducts confirmation and monitoring of internal control and information management frameworks before and during contracts, depending on the relevance to operations and the level of risk, but it is difficult to completely control the risks of external service providers.