Daiwa Securities Group Inc.

Interest rate increases accompanying the normalization of Japan's monetary policy (raised to 0.5% in January 2025 and to 0.75% in December of the same year), along with heightened geopolitical risks (Middle East situation, US-China tensions, Russia issues), may cause stock price declines, foreign exchange fluctuations, and interest rate movements, potentially leading to a significant deterioration in the earnings of the Group's securities-related business. A rapid worsening of the global fiscal and economic situation also carries the risk of developing into a financial or economic crisis, which could have a material adverse effect on the Group's business, financial condition, and operating results. The Group implements forward-looking integrated risk management utilizing stress tests and top risk management.

The securities-related business, asset management business, and investment business are characterized by significant fluctuations in fees, trading gains/losses, and gains/losses related to operating investment securities, and a significant adverse impact on performance may arise if economic and financial conditions deteriorate markedly. Consolidated operating revenue over the past three fiscal years has been on an expanding trend, from ¥1,277,482 million (87th fiscal year) to ¥1,372,014 million (88th fiscal year) to ¥1,467,983 million (89th fiscal year), but a sharp decline in revenue is expected during periods of deteriorating market conditions. The Group has implemented stabilization measures such as expanding assets under custody, expanding contract asset balances, and diversifying its revenue structure, but there is no guarantee that these measures will fully offset such volatility.

Daiwa Next Bank has entered into a share transfer agreement to acquire all shares of ORIX Bank Corporation effective April 27, 2026, and plans to merge with it after making it a wholly owned subsidiary. This share acquisition will add lending operations, primarily real estate-related loans, expanding the scale of the banking business, and thereby increasing credit risk related to real estate-related loans and the risk of credit concentration in specific industries or asset types. If the management integration (systems, administrative operations, personnel, risk management framework, etc.) does not proceed as planned, or if an impairment loss on goodwill or other assets occurs, this may adversely affect the Group's business performance and financial condition.

There is a risk that cyber attacks (including those via third parties), which have become more sophisticated and frequent due to the misuse of AI, could result in system outages that halt critical operations or lead to the leakage of customer information. If an information leak occurs, in addition to claims, damages lawsuits, and sanctions from regulatory authorities, there is a possibility of losing business opportunities due to reputational damage. The Group recognizes cybersecurity risk as an operational risk of increasing importance and is working to develop, maintain, and improve its information security framework.

As the ultimate designated parent company, the Group is required to maintain a consolidated capital adequacy ratio (Common Equity Tier 1 ratio of 4.5%, Tier 1 ratio of 6%, total capital adequacy ratio of 8%), a consolidated leverage ratio (3.15% or higher), and a consolidated liquidity coverage ratio and consolidated net stable funding ratio (each 100% or higher), and the Basel III finalization framework has also been applied since the end of March 2025. If these regulatory ratios decline significantly, this could lead to the spread of reputational risk and liquidity concerns, and if they fall below the minimum standards, the Group may be subject to business improvement orders, business suspension, or other measures from regulatory authorities. The Group sets internal management levels, conducts monitoring, and has established a system for regular reporting to management.

Amid the accelerating digitalization of financial services, if the Group's utilization of new technologies such as AI and Web3.0 and the digitalization of data and operations remain insufficient as the competitive environment changes, the Group risks falling behind competitors in customer touchpoints, operational efficiency, and new service development, thereby reducing its competitiveness. In addition, insufficient response to data privacy and security issues associated with AI utilization could lead to reputational damage and the loss of business opportunities. The Group treats this as one of its top risks, with management monitoring the situation.

There is a risk that changes in market conditions or deterioration in the financial condition of Group companies (including credit rating downgrades) could hinder fund-raising activities, or force the Group to raise funds at significantly higher costs. If liquidity in the market as a whole declines, it may become difficult to dispose of held assets (particularly lower-credit-quality assets), potentially forcing sales at prices significantly below acquisition cost, and a situation in which business continuity becomes difficult could also be envisaged. The Group strives to secure liquidity through management of its consolidated liquidity coverage ratio and consolidated net stable funding ratio.

If officers or employees commit intentional or negligent violations of laws and regulations (such as insider trading or market manipulation), the Group may be subject to administrative fines, business restrictions, business suspension, or other sanctions from regulatory authorities, as well as substantial claims for damages from business counterparties. In addition, if the framework for anti-money laundering and counter-terrorism financing measures fails to function effectively, the Group could face administrative sanctions and reputational damage. The Group is working to strengthen internal control functions across the Group, provide education and training to officers and employees, and develop its AML/CFT framework, but intentional illegal acts involving thorough concealment may go undetected for an extended period.

While the Group's core business is the securities-related business, it has also expanded into new business areas such as real estate, healthcare, and renewable energy, and its group strategy may need to be changed due to deteriorating economic and financial conditions, changes in the competitive environment, dissolution of business alliances or joint ventures, delays in efforts to improve organizational operating efficiency, or major changes in the legal system. If business collaboration among Group companies does not function sufficiently, it may become difficult to provide the high-value-added investment and financial services expected, creating a risk that the Group as a whole will fail to maximize its corporate value. The Group is continuously working to strengthen collaboration among Group companies and improve organizational operating efficiency.

In operations requiring a high degree of specialized expertise, including the securities-related business, competition for talent both within and outside the financial industry is intensifying, and if the Group faces difficulty in recruiting and developing talented personnel or experiences a large-scale outflow of personnel to competitors, this may adversely affect the Group's financial condition and operating results. In particular, in fund management operations within Alternative Asset Management, the success or failure of investment activities is highly dependent on personnel such as capitalists, and failure to secure such talent would directly lead to a deterioration in performance. The Group strives to enhance its personnel and training systems tailored to the characteristics of its business and to strengthen recruitment activities.