Mizuho Financial Group, Inc.

Against the backdrop of heightened tensions in the Middle East, overheating of AI-related investment, and expansion of the private credit market, if domestic and overseas economic conditions deteriorate or financial markets experience significant volatility, there is a possibility that credit-related costs will increase and valuation losses on held assets will occur. In addition, a scenario in which a rapid slowdown in the U.S. economy or the materialization of sovereign risk spreads in a chain reaction is also envisioned, and this could have a wide-ranging adverse impact on the Group's business performance and financial condition. The Group is working to mitigate risk through portfolio management and the use of credit derivatives, among other measures, but responding to environmental changes that exceed expectations remains a challenge.

The Group has a relatively high proportion of credit exposure to the real estate, manufacturing, and financial and insurance industries, and bears concentration risk with respect to main-bank clients and large borrowers. Changes in the domestic and overseas credit cycle, deterioration in the business environment of specific industries, and declines in asset prices such as real estate could result in the emergence of non-performing loans and declines in collateral value beyond expectations, increasing credit-related costs. The Group conducts continuous monitoring of individual borrowers and portfolio management, but it may be difficult to respond to a rapid deterioration in credit conditions.

The Group holds a large volume of marketable securities, including Japanese government bonds, and valuation losses and losses on sales may occur due to price declines associated with rising interest rates. In addition, due to differences in the maturity structures of financial assets and liabilities, there is a risk that interest rate fluctuations could directly result in losses. If significant interest rate fluctuations occur due to the materialization of sovereign risk resulting from fiscal deterioration or changes in monetary policy, there are concerns about an adverse impact on the Group's financial condition, including a decline in the capital adequacy ratio.

The Group, as a G-SIB, is subject to capital adequacy ratio regulations, leverage ratio regulations, liquidity coverage ratio regulations (LCR/NSFR), and TLAC regulations under Basel III, and if any of these ratios falls below certain standards, the Financial Services Agency may require corrective measures such as business scale-down or suspension. The revised capital adequacy ratio regulations have been applied since the end of March 2024, and increased regulatory compliance costs and greater difficulty in raising capital could affect business operations. Disclosed estimates indicate that a credit rating downgrade would require additional collateral of approximately ¥7.5 billion for a one-notch downgrade and approximately ¥29.0 billion for a two-notch downgrade.

Amid the increasing sophistication of cyberattacks due to the automation and acceleration of attack methods through AI, there is a possibility that unauthorized external access or virus infections could lead to the leakage or falsification of electronic data, business suspension, or unauthorized fund transfers. The global network connection environment, including third parties, expands this risk, and incidents via third parties such as cloud service providers are also a concern. The Group has implemented measures such as a 24/7 monitoring system centered on Mizuho-CIRT and the implementation of TLPT (Threat-Led Penetration Testing), but if these measures prove ineffective, serious consequences such as damages claims, administrative sanctions, and reputational damage could result.

If a large-scale system failure occurs due to factors such as human error, equipment malfunction, or cyberattacks, critical infrastructure such as core banking and settlement systems could be suspended, causing widespread inconvenience and disadvantage to customers. If operational resilience arrangements are inadequate, the time required to provide alternative measures or achieve recovery could become prolonged, creating a risk of administrative sanctions or reputational damage. The Group has established backup systems and formulated contingency plans, but the effectiveness of managing third parties, including outsourcing partners and cloud service providers, remains a challenge.

As financial crimes become more diverse and sophisticated, if anti-money laundering measures do not function effectively, business suspension, fines, or other administrative sanctions, as well as reputational damage, could result. Ahead of the FATF's fifth round of mutual evaluations in 2028, strengthening anti-money laundering measures and verifying their effectiveness are required, and inadequate response could develop into criticism from the international community. In addition, if the response to U.S. regulations relating to business involving countries designated as state sponsors of terrorism is judged to be inadequate, the Group could become subject to regulatory action by the U.S. government.

Both transition risk associated with the shift to a decarbonized society (such as strengthened carbon taxes and delays in the transition to decarbonization technologies) and physical risk from the intensification of natural disasters could spread to the Group in the form of increased credit-related costs resulting from the deteriorating business performance of client companies. As climate change responses proceed with significantly different directions in different countries, there are also concerns about the increasing difficulty of maintaining a globally consistent response. The Group has established its "Policy on Transactions Considering the Environment and Society" and is strengthening its response, but any divergence from stakeholder expectations could lead to loss of trust and increased credit costs.

As the competitive environment changes amid the rapid spread of generative AI and other technologies, if investment in and efforts toward new technologies are insufficient, existing systems could become obsolete, resulting in inferior product competitiveness and productivity. There are also concerns about losses arising from legal and regulatory violations or ethical breaches resulting from inappropriate management or use of AI, as well as insufficient response to cyberattacks and financial crimes that exploit AI. The Group is advancing AI management initiatives based on its "Mizuho AI Policy," but if it fails to keep pace with rapid technological evolution, serious consequences such as business suspension or administrative sanctions could result.

If human capital is impaired due to accelerated outflow of personnel to external organizations, unsuccessful recruitment, decline in employee vitality, or delays in talent development, the Group's competitiveness and efficiency could decline, adversely affecting business operations. There is also a risk that deteriorating working conditions, such as excessive workloads, could result in legal violations or reputational deterioration. The Group is working to secure and develop diverse talent, but securing specialized personnel to address technology-related needs, among other areas, is a particularly important challenge.