Business Risk
Key Risks
The Aozora Group recognizes the following items in its FY2023 business operations as its key risks. We discuss our risk appetite and business planning based on key risks, and also strive for a higher level of risk management.
1. Deterioration in credit quality
<Description of risk>
- Economic recession resulting from interest rate increases designed to combat inflation implemented by central banks in the U.S. and other countries
- Acceleration of global disruption due to worsening conditions in Russia and Ukraine, conflicts between the U.S. and China, and growing geopolitical tensions in other areas
- Decline in the value of risk-weighted assets due to a deteriorating financing environment
- Rapid progression of interest rate increases in Japan and yen depreciation as a result of the Bank of Japan’s change in monetary policy
- Decline in the corporate value of investments and borrowers that fall behind in responding to issues regarding climate change and respect for human rights
<Countermeasures>
- Despite growing uncertainty about the future, including the risk of economic recession due to the impact of interest rate increases by central banks in multiple countries and geopolitical tensions, we will adhere to our lending and investment management policies and guidelines, carefully analyze the business risks of our borrowers, and selectively undertake high-quality projects to build a well-diversified, high-quality portfolio. We will also analyze existing transactions in a timely manner to identify warning signs and conduct proactive credit management.
2. Decrease in value of held securities due to financial market volatility
<Description of risk>
- Financial market turmoil due to geopolitical tensions
- Sharp decline in the value of securities resulting from ongoing interest rate increases designed to combat the continued inflation implemented by central banks in several countries
- Rapid progression of interest rate increases in Japan and yen depreciation as a result of the Bank of Japan’s change in monetary policy
<Countermeasures>
- In an environment where the outlook is uncertain, we aim to build a securities portfolio with high liquidity and implement flexible risk control while taking into account the correlation among interest rates, equities, and credit. In addition, we have developed a framework that allows for an early and appropriate response by establishing various points to check regarding risk levels and losses.
3. Instability of funding due to turmoil and increased volatility in the financial market
<Description of risk>
- Geopolitical tensions due to worsening conditions in Russia and Ukraine as well as conflicts between the U.S. and China
- Reduction in foreign currency funding availability and higher funding costs mainly due to reduced market liquidity resulting from heightened turmoil and volatility in financial markets, which are attributable to both ongoing interest rate increases designed to combat the prolonged inflation and interest rate decreases in the economic recession phase implemented by central banks in several countries
- Reduction in yen funding availability and higher funding costs mainly due to reduced market liquidity and fluctuations in the interest rate environment for bank deposits resulting from heightened turmoil and volatility in financial markets, which are mainly attributable to the Bank of Japan’s change in monetary policy
<Countermeasures>
- With regard to cash flow in yen and foreign currency, we take every possible measure to secure necessary fundings to cover a range of settlements by holding adequate securities and other assets with high liquidity. In addition, we regularly perform a simulation of funding pressures as a means to test the adequacy of funds on hand to maintain our asset size and also conduct exercises aimed to test our procedures for securing funds.
4. Outbreak of wide-scale disasters, cyberattacks, system failures and other crises
<Description of risk>
- Significant impact on the Aozora Group’s operations in part or whole mainly due to natural disasters, cyberattacks, serious system failures, terrorism, armed attacks and pandemics
- Suspension of the delivery of services to customers, information leaks and illegal remittance, as well as the resulting damage to the Aozora Group’s corporate value
<Countermeasures>
- To prevent any significant impact from natural disasters, cyberattacks, serious system failures, terrorism, armed attacks, pandemics and other threats on the Aozora Group’s operations, we strive to ensure operational resilience mainly by formulating business continuity plans (BCP), exercising a set of drills at regular intervals and developing backup sites. Our cybersecurity initiatives include the evolution of multi-layered technical defense measures, enhancement of detection capabilities and recovery drills involving both business groups and IT groups.
5. Delays in Aozora’s structural/business transformation
<Description of risk>
- Decline in the Aozora Group’s earnings potential due to the global shift in industrial structure, advancement of digitalization, commoditization of financial products, intensified competition from other entities entering the financial sector, and delays in responding to deregulation in the scope of banking business
- Higher foreign currency funding costs, loss of sustainable financing opportunities and damage to the Aozora Group’s corporate value, resulting from a lower rating in the ESG evaluation due to a perceived reluctance to promote sustainability
<Countermeasures>
- Please refer to the sections titled “New Mid-term Plan ‘Aozora 2025’ (FY2023-25)” (pages 10-15) and “Sustainability Promotion” (pages 60-63) in the Annual Report.
6. Inadequate response to financial crimes, occurrence of internal fraud and information leaks
<Description of risk>
- Risk of being subject to penalties or administrative punishments mainly due to inadequate preventive measures taken against financial crimes, including money laundering, terrorist financing and proliferation finance, inadequate response to economic sanctions under the Foreign Exchange and Foreign Trade Act, an inadequate framework for eliminating anti-social elements, any violation of insider trading regulations and leaks of customer information; as well as the risk of damage to the Aozora Group’s corporate value
<Countermeasures>
- We intend to develop an anti-money laundering management system and ensure the ongoing effectiveness of our response to the targets of economic sanctions as well as promote the further enhancement of these systems based on the revised Anti-Money Laundering Guidelines and the revised Foreign Exchange Inspection Guidelines. As part of our annual compliance program, we develop plans for and check the status of our training programs, monitoring, dissemination of laws, regulations, and internal rules as well as other activities. In addition, Aozora works to further instill its Code of Ethics and Conduct by delivering regular messages from top management as well as receiving written pledges from all officers and employees.
We also continue to promote awareness of insider trading prevention and information management among officers and employees mainly through alerts, trainings, and e-learning.
7. Sustainability of human resources
<Description of risk>
- Shortage or outflow of personnel who are able to respond to changes in the business environment or who possess the required skill sets for our business areas of focus, including Aozora’s Strategic Investments Business, which constrains the Aozora Group’s business operations and sustainable growth that can be realized through its business strategies
<Countermeasures>
- Any shortage and departure of employees who are capable of responding properly to the changing business environment or have skill sets required for our focus areas of business, including Aozora’s Strategic Investments Business, could pose a risk to the Aozora Group’s sustainable growth that can be achieved through the implementation of business operations and strategies.
For our human resources strategy concerning the Bank’s HR system and human resources development, please refer to the sections titled “New Mid-term Plan ‘Aozora 2025’ (FY2023-25)” (pages 10-15) and “Human Resources Strategy” (pages 74-81) in the Annual Report.