Business Risk

Key Risks

In FY2021 business operations, among multiple risk factors identified in our business environment, the Aozora Group recognizes the following items as its most significant risks (i.e. risks that pose the highest risk and potential impact for management in the coming year). We focus on key risks when discussing our risk appetite and business planning, and also develop countermeasures that provide for effective monitoring and flexible responses.

1. Deterioration of credit quality, decrease in the value of securities portfolio

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  • Deterioration of quality of the borrowers and increase in credit costs due to the borrowers’ sluggish business and falling collateral values resulting from prolonged COVID-19 pandemic and reversal of real estate values
  • Decline in the values of securities held and impairment of market liquidity caused by destabilized money market on the back of: i) the COVID-19 outbreak, ii) excessive liquidity because of monetary easing, iii) materialization of geopolitical risks on a global basis and iv) rising concerns over inflation and increasing interest rate

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  • Aozora maintains its selective origination policy regarding investment/loan transactions while carefully analyzing business risk and considering the diversification of its investment/loan portfolio. The Bank also continues to perform predictive control within its Business Groups, Risk Management Group and senior management. In addition, the Bank conducts capital control, including stress testing, based on a set of established guidelines designed to limit credit risk concentrations.
  • For risk related to the securities portfolio, the Bank works to establish an efficient portfolio with high liquidity comprised of a balanced mix of risks including interest rate, equity and credit risk, in addition to flexible risk control in light of market conditions and the financial environment.

2. Unstable foreign currency funding

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  • Impairment of foreign currency liquidity and higher funding cost due to financial market turmoil

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  • Aozora has worked to develop a framework that ensures a sufficient level of liquidity available under stressed conditions along with monitoring and verification through periodic stress testing. The Bank also continues to work towards long-term and stable foreign currency funding, including the ongoing issuance of foreign currency dominated bonds.

3. Delay in Aozora’s structural/business transformation

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  • Reduction of the Aozora Group’s earning power as a result of delays about structural change/business model conversion needed in responding to further digitalization of society, commoditization of financial products, intensified competition in the financial industry, and relaxation of regulations on the scope of banking business

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  • Amid the current historic turning point for the industrial structure, Aozora will strive to contribute to society through proactive risk-taking, as a financial partner with a deep understanding of our customers’ business, in order to foster new business and support corporate restructuring and business recovery while promoting Aozora’s Strategic Investments Business.

4. IT Risk

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  • Damage to the Aozora Group’s reputation caused by leakage of customer information/suspension of services by cyber- attack, and obstacles to business continuity due to mass system failure

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  • In terms of cybersecurity measures, the Bank intends to continuously train cybersecurity personnel and maintain a required level of cybersecurity while effectively implementing entry/exit measures against targeted cyberattacks and internal measures, including more strengthened monitoring of unauthorized access, as well as practical training for system recovery from ransomware and other attacks.
  • For responses to critical system failures, the Bank promotes efforts to ensure a sufficient level of verification when performing system updates and has developed a framework that enables the proper guidance of and response to customers in the event of a system failure.

5. Anti-money laundering, anti-terrorism financing and transactions with anti-social elements

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  • Administrative punishment and damage to the Aozora Group’s reputation because of: i) insufficient measures against financial crimes including money laundering and financing terrorism, ii) inadequate system to eliminate anti-social elements, iii) acts against laws concerning bribery/corruption/insider trading and delinquent behavior

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  • In accordance with its annual compliance program designed to maintain and improve compliance awareness among Aozora’s officers/employees, the Bank plans initiatives to further their understanding of laws and internal rules, conduct monitoring and training, and check the progress of the program. The Bank also works to improve its framework to manage transactions, including continued customer control, as part of its anti-money laundering and anti-terrorism financing measures.

6. Mismatch of personnel to business

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  • Risks that may interfere the Group’s strategy formulation and business conduct as a result of insufficient/loss of personnel with skills required for changing business environment due to enhanced digitalization of society and the focused business

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  • The introduction of a new human resources system enables Aozora to eliminate the barriers of age and restrictive career courses and appoint specialized personnel as a financial group that continues to take on new challenges as one unified team.

7. Climate change

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  • Funding cost increase, loss of investment opportunities and damage to the Aozora Group’s reputation resulting from insufficient responses to climate change issues and the disclosure
  • Increase in credit costs owing to declined corporate values of the portfolio companies with insufficient responses to climate change issues

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The forward looking statements contained in this document are made based upon the Bank and Bank Group's current estimations, perceptions and evaluations as of the date the Annual Securities Report was submitted. The Bank is aware of these risks described in this document, including top risks, and striving to eliminate or mitigate these risks and implementing respective measures. Risk management is conducted within the Management Committee, ALM Committee, Integrated Risk Committee, Credit Committee, Investment Committee, CAPEX Committee, Customer Protection Committee and periodically reported to the Board of Directors.