Business and Other Risks

Of the matters related to business and economic conditions
outlined in the annual securities report, below are the majorrisks management recognizes as having the potential tomaterially affect the financial condition, operating performanceand cash flows status of YMFG (the Bank and its consolidatedsubsidiaries). Recognizing this potential, YMFG strives to prevent
such risk from manifesting and to respond appropriately in theevent they do occur.
The forward-looking items described below are those of which
YMFG is aware as of the end of the fiscal year under review.
1. Credit Risk
(1) Non-Performing LoansYMFG maintains sufficient allowances against non-performing loans
to maintain the soundness of its assets. However, YMFG’s nonperforming loans and credit expenses could increase as the result of
economic movements in Japan and the local community, fluctuations
in real estate values and share prices, and the management status ofrecipients of YMFG’s financing. Such factors could have a negative
effect on operating performance and the financial condition, reducing
reduce equity capital.
To date, YMFG has worked diligently to move non-performing
loans off the balance sheet, to write off non-performing loans
appropriately, and to post sufficient allowances for doubtful accounts.
However, the Group could face larger-than-expected losses when
disposing of non-performing loans or incur higher-than-expected
amortization. Such factors could have a negative effect on operating
performance and the financial condition.
(2) Allowance for Doubtful Accounts
In accordance with predetermined standards, primarily, estimated loss
amounts for the next one year and next three years are calculated for
assets corresponding to normal assets and assets requiring caution.
For assets classed as potentially bankrupt assets, loss amounts
are stated by subtracting from lending amounts the amount ofrecoverable collateral or the expected amount recoverable fromguarantees. However, actual losses may differ from the amounts
expected when the allowance for doubtful accounts is posted. As
a result, actual losses could significantly exceed expected losses,
resulting in an insufficient allowance for doubtful accounts.
Furthermore, worsening overall economic conditions, declines incollateral values and other unexpected factors may require the Groupto revise its set standards and expected losses, resulting in the needto increase the allowance for doubtful accounts. This could have anegative effect on operating performance and the financial condition.
(3) Loans by Business Category, Geographic Region and Other Factors
From a risk management perspective, YMFG conducts credit
management of its portfolio by rating level, business category, scale,region and other factors.
However, large amounts of non-performing loans could begenerated in a specific business category and, if poor businessconditions in that business sector are prolonged, new corporatebankruptcies could arise. In such circumstances, YMFG’s credit
expenses could increase, having a negative impact on YMFG’soperating performance and financial condition.
Furthermore, as YMFG’s main bases of operation are in Yamaguchi
Prefecture, Hiroshima Prefecture and the city of Kitakyushu, theGroup’s operations tend to be particularly affected by regional
economies. Conditions in those regional economies could therefore

15YMFG Annual Report 2020

have a negative impact on YMFG’s operating performance andfinancial condition.
(4) Response to Borrowers
In some cases, YMFG may not exercise its legal rights even whena borrower defaults on their financial obligations, after taking into
account the efficient and effective recovery of loans, among otherfactors. Furthermore, YMFG may support or cooperate with suchborrowers in their efforts to secure additional loans. YMFG’s credit
costs could rise as the result of a deterioration of the creditworthinessof such borrowers and its support, having a negative impact onYMFG’s operating performance and financial condition.
(5) Impact of COVID-19
To prevent the spread of the novel coronavirus disease (COVID-19),
companies are being asked to suspend operations, and people arebeing asked to refrain from going outdoors. This situation is affecting
our region to an unprecedented degree. Given these circumstances,
YMFG is working to understand the conditions of individual borrowers
in a timely and appropriate manner and provide various types of
support to help customers with cash flow and other aspects ofbusiness continuity, including through the application various typesof support measures. However, if the operating environment wereto deteriorate, credit costs could rise, having a negative impact on
YMFG’s operating performance and financial condition.
2. Risks Related to the Capital Adequacy Ratio(1) Capital Adequacy Ratio
As YMFG has overseas bases, it calculates a consolidated capital
adequacy ratio according to uniform international standards asprovided by “standards for determining whether a bank holding
company’s equity capital is sufficient, after taking into account assetsheld by the bank holding company and its subsidiary companies,
based on the provisions of Article 52-25 of the Banking Act” (Financial
Services Agency Notification No. 20 of 2016).
Accordingly, the consolidated capital adequacy ratio must be
maintained at 8% or higher, the Tier 1 ratio at 6% or higher and theTier 1 ratio on common shares at 4.5% or higher. YMFG’s capital
adequacy ratio currently exceeds these levels. However, changes inamounts of capital stock, retained earnings and valuation differenceson available-for-sales securities, as well as fluctuations in risk assets,
could affect the capital adequacy ratio.
Uniform international standards call for the setting of a capitalconservation buffer (2.5% above individual minimums). Currently, YMFG
exceeds these buffer levels. However, if it were to fall below these levels,
YMFG might limit dividends and other outflows, having a negative
impact on YMFG’s operating performance and financial condition.
Among consolidated banking subsidiaries of YMFG, Yamaguchi
Bank calculates its non-consolidated capital adequacy ratio
according to uniform international standards based on “standardsfor determining whether a bank’s equity capital is sufficient, aftertaking into account assets held by the bank, based on the provisionsof Article 14-2 of the Banking Act” (Financial Services Agency
Notification No. 19 of 2016). Momiji Bank and Kitakyushu Bank
calculate their non-consolidated capital adequacy ratios according todomestic standards, based on Financial Services Agency Notification
No. 19 of 2016.
(2) Deferred Tax Assets
As of the end of the consolidated fiscal year under review, Japaneseaccounting standards allow companies to record deferred tax assets asexpected tax benefits to be realized in the future.
Uniform international standards allow deferred tax assets related totemporary differences to be included in equity capital, up to a certain
limited amount, and YMFG includes in equity capital an amountcalculated in accordance with Financial Services Agency Notification
No. 28 of 2012.
As the balance sheet amount of deferred tax assets is based on
various forecasts and assumptions, including those related to futuretaxable income, YMFG may reduce deferred tax assets if it decides
that all or part of these deferred tax assets cannot be recovered.
Such a reduction would have a negative impact on YMFG’s operating
performance and financial condition and cause the capital adequacy
ratio to decrease.
3. Market Risks(1) Interest Rate Risk
YMFG, which engages mainly in banking operations, is affected byfluctuations in market interest rates through interest on loans—anasset investment method, yields on bond and other investments, andinterest rates on deposits—a funding method. Mismatches between
the amount and timing of asset investments and funding, as well as
unforeseen interest rate fluctuations, may have a negative effect on
YMFG’s operating performance and financial condition.
(2) Risk of Price Fluctuations on Holdings of Available-for-Sale
Securities
YMFG has substantial holdings of marketable, available-for-salesecurities for investment purposes. Broad-based and large-scale pricedeclines may engender impairments or valuation losses on holdingsof available-for-sale securities, which could have a negative effect on
YMFG’s operating performance and financial condition and lower thecapital adequacy ratio.
(3) Exchange transactions
YMFG’s operations are affected by exchange rate fluctuations.
Ongoing yen appreciation reduces the value of foreign currencytransactions when converted to yen. Also, certain assets and liabilities
are presented in foreign currencies. If it is not possible to offset assets
and liabilities denominated in foreign currencies by the same amountor hedge such differences effectively, YMFG’s operating performanceand the financial condition may be negatively affected.
(4) Impact of COVID-19
YMFG has in place a system to appropriately manage its holdings ofavailable-for-sale securities. However, if financial markets deteriorate,
the value of these holdings of available-for-sale securities could
decrease, having a negative impact on YMFG’s operating performanceand financial condition.
4. Liquidity Risks(1) Cash Flow Risk
YMFG raises the majority of its funds through deposits and istherefore able to manage funds provided through a stable source offunding. However, inconsistencies between investment and funding or
unexpected outflows of funds could hinder funding, rendering YMFG
unable to fulfill its payment obligations on their settlement dates.
Alternatively, YMFG may be compelled to raise funds at substantiallyhigher interest rates than usual, thereby generating losses.

(2) Market Liquidity Risk
Market confusion may make it impossible for YMFG to buy andsell available-for-sale securities or it may have no alternative but toconduct such transactions at prices less favorable than usual, thereby
generating losses.
(3) Risk Related to Liquidity Regulations
Uniform international standards require the liquidity coverage ratioto be maintained at 100% or higher. YMFG’s liquidity coverage ratio
currently exceeds this level. However, YMFG’s ratio could fall below
this level due to changes in the amount of eligible liquid assets or cash
outflows, having a negative impact on YMFG’s operating performanceand financial condition.
5. Operational Risks(1) Administrative Risk
Although its operations center on banking, YMFG also conducts
comprehensive, regionally focused financial services including
securities and credit card operations. If executives or employees wereto perform operations inaccurately or if accidents or instances offraud were to occur, in addition to direct losses YMFG could suffera loss among customers of the trust it has cultivated over manyyears, consequently having a negative impact on YMFG’s operating
performance and financial condition.
(2) Risk of Information Leaks
YMFG retains significant information about customer deposits andloans that should not be leaked outside. The Group has in placemeasures to prevent outside incursions of its online and other systems.
However, unexpected circumstances could result in outflows of suchinformation. The Group stringently manages information printed on
paper or stored in electronic media in accordance with information
asset management regulations, but such information could be
leaked outside the Group by people with malicious intent or as theresult of the mishandling of information. Such situations could callinto question the Group’s social responsibility and result in claims ofcompensation for damages. In addition, such situations could have anegative effect on operating performance and the financial condition.
(3) System Risk
YMFG has measures in place to address system risk, such as computer
systems going down or malfunctioning, as well as against fraudulent
use and external cyberattacks. YMFG also has thorough security
measures in place and manages information stringently in line with
its security policy. However, the manifestation of system risk due toa disaster, the failure of equipment or telecommunication circuits orprogram failure could result damage or outflows of information. Thissituation could cause the suspension of payment functions and service
operations, as well as a loss in the trust of society, negatively affecting
YMFG’s operating performance and financial condition.
(4) Legal Risk
YMFG strives to ensure thorough compliance and is reinforcing its
systems to prevent legal violations. Nevertheless, YMFG could conduct
legal violations within its various business operations, resulting inlawsuits and negatively affecting YMFG’s operating performance andfinancial condition.
(5) Human Risk
YMFG endeavors to recruit and train competent human resources.
YMFG Annual Report 202016

However, the failure to recruit or train sufficient human resources
could result in a decrease in competitiveness and efficiency, negativelyaffecting YMFG’s operating performance and financial condition.
(6) Reputational Risk
Negative news reports and rumors about YMFG and the financial
industry, whether true or not, could negatively affect YMFG’soperating performance, financial condition and share price.
6. Business-Related Risk
(1) Risk of Competition
The competitive environment within the financial sector has changed
substantially in recent years, due to extensive deregulation of financial
systems, the restructuring of regional financial institutions andentry into the financial sector of companies from other industries.
YMFG’s sales base could lose its competitive advantage against otherfinancial institutions as a result, negatively affecting YMFG’s operating
performance and financial condition.
(2) Risk of Unsuccessful Business Strategies
Although its operations center on banking, YMFG also conducts
comprehensive, regionally focused financial services including
securities and credit card operations and enacts business strategies
aimed to enhance corporate value. However, greater-than-expectedchanges in the operating environment could prevent YMFG fromgenerating the level of earnings it anticipates, or costs could be higher
than anticipated, negatively affecting YMFG’s operating performanceand financial condition.
Furthermore, YMFG could fall short of its expected results if it isunsuccessful in enacting management strategies for development
outlined in the YMFG Medium-Term Plan 2019, which commenced in
the fiscal year ended March 31, 2020.
(3) Holding Company Risk
Being a bank holding company, the majority of YMFG’s earnings
come from the dividends paid by its wholly owned subsidiaries,
Yamaguchi Bank, Momiji Bank and Kitakyushu Bank. Under certainconditions, the Banking Act or the Companies Act may restrict theamounts that Yamaguchi Bank, Momiji Bank and Kitakyushu Bank
can pay as dividends to YMFG. In addition, Yamaguchi Bank, Momiji
Bank and Kitakyushu Bank may become unable to pay dividends toYMFG due to the insufficient posting of earnings. Their inability to pay
dividends to YMFG could render YMFG unable to pay dividends.
(4) Risk of an Expanding Scale of Operations
In line with legislative changes and deregulation, YMFG has
expanded its scope of operations to take advantage of new earning
opportunities. This greater scale of operations exposes YMFG to newrisks. Also, these businesses may not progress as expected. As a result,
YMFG’s operating performance and financial condition could benegatively affected.
7. Other Risks(1) Risk Related to Pension Obligations
Decreases in the market value or investment yield of YMFG’s pension
assets or changes in the base rate used for calculating retirement
benefit obligations can result in losses. Also, changes in pension
plans can incur amortization expenses on past service obligations. In
addition, changes in the interest rate environment and other factors
can have a negative impact on the unfunded portion of retirement
benefit obligations.

17YMFG Annual Report 2020

(2) Risk Related to Impairment of Fixed Assets
YMFG applies the “Accounting Standard for Impairment of FixedAssets” to the fixed assets it owns. Changes in the purpose of useof these fixed assets, or decreases in profitability or asset values
could lead to valuation losses, having a negative impact on YMFG’soperating performance and financial condition.
(3) Risk of Financial Crimes
In the face of rampant crimes targeting financial institutions, suchas the forgery or theft of cash cards and remittance fraud, YMFG
is strengthening its security measures to prevent damages due tofinancial crimes. However, the advent of sophisticated financial crimes
could render YMFG unable to stop illegal or inappropriate transactions,leading to unexpected losses and credit losses, having a negative
impact on YMFG’s operating performance and financial condition.
(4) Risk of Regulatory Change
As a bank holding company, YMFG is subject to restrictions andsupervision under the Banking Act and is bound to operate within
the restrictions in place as of the end of the consolidated fiscal year
under review (including laws, regulations, policies and conventional
practices). Consequently, future regulatory changes could negatively
affect YMFG’s execution of operations, operating performance,
financial condition and capital adequacy ratio.
(5) Risk of Credit Rating Being Lowered
If rating agencies were to lower their ratings, YMFG could be required toengage in transactions under unfavorable conditions or become unable
to engage in certain transactions. This situation could have a negative
impact on YMFG’s operating performance and financial condition.
(6) Compliance Risk
To encourage all executives and employees to reinforce thecompliance system, each year YMFG formulates compliance program
practice items and undertakes a variety of initiatives. However, if acompliance-related problem were to arise, it could cause direct losses
as well as resulting in the loss of trust among customers cultivatedover many years. As a result, YMFG’s operating performance andfinancial condition could be negatively affected.
(7) Risks Related to External Factors
External factors such as natural disasters (including earthquakes, stormand flood damage, and contagious diseases), man-made disasters(including terrorism and cybercrime) and technological disasters(including electrical outages and computer trouble), could resultin damage to YMFG’s head office, branches and other locations,threatening YMFG’s ability to continue all or part of its operations andsignificantly affecting YMFG’s operations.
In addition, to help prevent the recent COVID-19 pandemic fromspreading, YMFG has decentralized operations at headquarters
and sales branches, introduced teleworking, and adopted a timeshifted working schedule as part of its health maintenance anddisease-prevention efforts. However, if the pandemic fails to subside,
continues for a protracted period or increases in intensity, or if YMFG
employees were to become infected, ensuring business continuity
could become problematic. As a result, YMFG’s operations andfinancial condition could be negatively affected.