Financial strategy

We implement financial management based onsoundness, profitability, and shareholder returns
as part of efforts to enable regional development
and improve corporate value.
Director and Managing Executive Officer,

Soichi Yamamoto

1 Performance■
Fiscal Year 2022
In FY 2022, consolidated ordinary profit increased by ¥3.7 billion year on year to ¥29.5 billion and net income attributable to owners of parent increased by ¥2.1 billion
year on year to ¥20.4 billion. We achieved our publicly announced forecast and increased profits year on year for the third consecutive year. I believe that we have thus
been able to show positive results to all of our stakeholders. This fiscal year was the year we were influenced tremendously by changes in the external environment.
The central banks of the U.S. and other countries rapidly raised their interest rates, which affected the Group’s securities management. Unrealized loss grew for someforeign currency bonds, and the Group recorded losses on sales. However, we had created enough unrealized gains on other assets (stocks, investment trusts, REITs, etc.)
to cover these losses. Because we made changes to our portfolio at the beginning of the rapid rise in interest rates, we have also recently been able to make major
improvements to the durations of our foreign currency bonds.
● Change in net income attributable to owners of parent● Foreign currency bond durations - after taking asset-swapping into consideration(Unit: Billions of Yen)

(Unit: Years)
4.2
20.4
18.3

3.4

+2.1
14.4
11.9

1.8

FY 2019

FY 2020

FY 2021

FY 2022● 10BPV (Unit: Billions of Yen)

* Includes some figures other than loans (security purchases, etc.)

15CHUGIN FINANCIAL GROUP, INC.

Mar 31, 2023

-1.6

-1.0

-0.6

FY 2022

FY 2021

Environmentally-related

Sept 30, 2022

*BPV: Changes in current value when the interest rate rises one basis point (0.01%)● Cumulative financing (Unit: Billions of Yen )Sustainable financing

Mar 31, 2022

YOY change

FY 2030 targets

444.6

641.8

197.2

1,500.0

105.6

215.3

109.7

1,000.0

Turning our attention to our internal environment, I feel that the measures that we have been implementing have begun to bear fruit.
With regard to loans, one of the Group’s main revenue pillars, we have provided support to local customers, primarily through regional business loans and personalloans, and our loan balance has risen steadily. We have been stepping up our sustainable financing for the environmental and social segments, increasing our cumulative
financing by ¥197.2 billion year on year to roughly ¥641.8 billion.
In our consulting sales, we are deeply involved in the solving of the issues our customers face, thus revenue from structured financing, M&As, business matching, andthe like is growing year by year. In FY 2022, we proposed solutions that addressed changes in the foreign currency exchange market, significantly increasing ourderivative fee revenue.
Furthermore, we established four new Group companies*. We hope that these companies will become new growth drivers for the Chugin Group.
* Four companies: Chugin Capital Partners, Chugin Human Innovations, C Cube Consulting, and Chugin Energy

9,271● Changes in solution-related revenue (Unit: Millions of Yen)

+2,183
2,126

Group companies*7,088
6,452

Fees on derivative+1,3552,011

2,532

2,000

Other1,177

Other investment banking
1,222Intermediary fees
(M&As, consulting, etc.)

Fees on corporate bonds

Investment banking

297

business included535

in net fee income

756

238

301
822+184

620
1,140
956
643

517+390

572
Fees on syndicated loans

1,831

1,441

1,066
FY 2020

FY 2021

FY 2022* Total of lease gross profit and operating revenue from Chugin Card, Human Innovations, and C Cube Consulting (after excluding internal transactions)Management PlanIn FY 2017, the Group launched its 10-year long-term management plan, “Vision 2027: Plan for Creating the Future Together.” As part of this long-term management
plan, we have set out the following as KPIs for the final year of the plan (FY 2026): Net income attributable to owners of parent of ¥30.0 billion; Consolidated capital
adequacy ratio to remain stable at 12%; and Consolidated ROE of 5%. The previous medium-term management plan was positioned as “Plan for Creating the Future
Together: Stage II (FY 2020 to FY 2022),” a three-year plan based on the long-term management plan, and this three-year plan came to an end in FY 2022. Looking backat the plan’s financial KPI, in FY 2022 we recorded ¥20.4 billion in net income attributable to owners of parent, greatly surpassing the KPI of ¥15.0 billion. We alsoachieved our consolidated capital adequacy ratio KPI target of remaining stable at 12%, reaching 12.87% as of the end of FY 2022 (for Chugin Financial Group,consolidated).
Financial KPI

Net income attributable to owners of parent
ROE
Capital adequacy ratio

FY 2022Plan¥15.0 billion―Remain stable at 12%

FY 2026 targetsResults¥20.4 billion¥30.0 billion

3.70%

5% or higher

12.87%

11% to 13%

CHUGIN FINANCIAL GROUP, INC.

16

Financial strategy
Given the above, we believe that we performed well overall during the preceding medium-term management plan period. However, our PBR was low, at roughly 0.3, andthere remain issues that we must tackle in order to increase our corporate value.
We recognize that enhancing our earning power will be essential to improving our corporate value, and we have set as a KPI target the achievement of ¥30.0 billion in“net income attributable to owners of parent” in FY 2026, the final year of our long-term management plan. As I mentioned earlier, profit rose steadily through theprevious medium-term management plan, but ¥30.0 billion is still a high KPI target. We must further enhance our consulting sales and accelerate our efforts towards
revitalization of regional economies while also leveraging group synergy, including synergy with newly established companies. From the perspective of capital efficiency,
we also recognize the need to deepen our internal discussions of indicators such as our consolidated capital adequacy ratio and consolidated ROE. Banks have always
been called on to exercise “sound, solid” management, and this, of course, remains unchanged. However, in the future, banks and comprehensive financial services
groups like our own will also need to focus on growth potential and capital efficiency in addition to the elements mentioned above. Unfortunately, I believe that our Grouphas yet to achieve the level sufficiently. Through the new medium-term management plan period, as well, we will continue to work on while addressing changes in theexternal environment, including the demands placed on us by society.

2 Capital Policy / Shareholder Returns■
Before we establish the holding company, the Chugoku Bank was often praised for being a “solid bank.” This “soundness” is a strength that we established through therelationships we have built with our customers through the years. Now, having become a holding company, the Chugin Financial Group will leverage this strength toactively utilize capital to contribute to the development of the community.
With respect to capital utilization, under the new medium-term management plan, we have set a “consolidated capital adequacy ratio of 11.0% to 13.0%” as thecontrol range for our Group’s goal. This was arrived at by starting with a limit level for distribution of profit of 10.5% and applying a “growth investment buffer” and a “riskbuffer” from the perspectives of management soundness and profitability (capital efficiency). We will control our capital levels while investing capital in assets, primarily
focused on core businesses and strategic operation.
When transitioning to a holding company structure, we established a “Management Resource Committee” as a deliberative organization that appropriately allocatesmanagement resources related to human resources, costs, and the like for the Group as a whole. We will use this Management Resource Committee effectively to elevate● Consolidated capital adequacy ratio
Target level

FG Consolidated
Mar 31, 2023

13.0％

Control range
11.0％
12.87%

10.5％(limit)Overall assets

Core business
Regional business loans, personal loans, etc.

Strategic operation

Renewable energy, real estate/ ships/aircrafts, Marketable loans (including Tokyo), securitiesequity, overseas sites, new businesses, etc.
management, etc.

Active initiatives based on sales strategies● Balance plan

Approx. ¥4.5 trillion

Integrated operation based on market
environment

Approx. ¥0.5 trillion(approx. +¥500.0 billion)

Approx. ¥4.0 trillion

Marketable operation(approx. +¥200.0 billion)

Dynamically adjust through loans/Approx. ¥0.3 trillion

securities based on market
environment

Mar 31, 2023

17

CHUGIN FINANCIAL GROUP, INC.

Mar 31, 2027

Mar 31, 2023

Mar 31, 2027

Total payout ratio*1

36.2％

38.2％

38.9％

36.9%

41.6％

40% or higher¥30 (+¥2)¥30¥28
Dividend amount per share
Total payout amount¥8.5 billion¥22¥22¥23¥7.1 billion
3.0

Share buyback*2
Total dividend amount

1.9¥5.5 billion¥5.3 billion

1.4

Total payout ratio of 40%

1.0¥4.1 billion

or higher through dividends
and share buybacks

4.1

4.1

4.3

FY 2018

FY 2019

FY 20205.2

5.5

FY 2021

FY 2022

FY 2023*1 Until FY 2019: Non-consolidated income base for Chugoku Bank
FY 2020 to FY 2021: Consolidated income base for Chugoku BankFY 2022 and after: Consolidated income base for Chugin Financial Group*2 Carried out for one-year, starting from the general meeting of shareholders

our business portfolio management throughout the Group.
With regard to our shareholder return policy, we also set the goal to raise
our total payout ratio from 35% or higher to 40% or higher through dividends
and share buybacks in the new medium-term management plan. We willcontinue to engage in capital management that balances soundness,
profitability, and shareholder returns.
Through measures such as these (increasing our earning power andimproving our capital efficiency), we will aim to achieve our KPI target of ROEof 5% or more and we will seek to increase our ROE above capital costs,
increasing our Group’s corporate and shareholder value and raising our PBR.

● ROE (unit: %) (based on TSE)
5.0

3.9

4.0
3.7
3.2

3.0

Medium-term
management
plan KPI

2.6
2.2

3 Cross Shareholdings■
Our basic approach is for cross shareholdings to be held only when deemednecessary for achieving sustainable growth of the holding party and the Groupor for increasing corporate value. Looking at it from the perspective of capitalefficiency and managing shareholding risk, we intend to promote a reductionof cross shareholdings upon dialogue with the holding parties. By March 31,
2027, we plan to reduce the cross shareholdings by 20% in book value basein comparison to March 31, 2022. (We will perform regular and stringent
evaluations of all stocks from the perspectives of “profitability in light ofcapital costs,” “relationship with the regional economy,” and “management
strategy viewpoints.”)

Mar 31,
2017

Mar 31,
2018Mar 31,2019

Mar 31,2020

Mar 31,2021

Mar 31,2022

Mar 31,2023

Mar 31,2027● Reduction plan (unit: Billions of Yen)
from Mar 31, 2022

50.2
47.0

20% reduction*40.0

Mar 31, 2022

Mar 31, 2023

Mar 31, 2027

* Book value. Includes listed shares, unlisted shares, and deemed holding shares.

CHUGIN FINANCIAL GROUP, INC.

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