Business and Other Risks

Risks that could have a material impact on investor

However, large amounts of non-performing loans could bedecisions are outlined below. Forward-looking items

generated in a specific business category and, if poor businessdescribed below are those of which YMFG is aware as ofconditions in that business sector are prolonged, new corporate

the end of the fiscal year under review.

bankruptcies could arise. In such circumstances, YMFG’s credit
expenses could increase, having a negative impact on YMFG’s

1. Non-Performing Loans(1) Non-Performing Loans

operating performance and financial condition.
Furthermore, as YMFG’s main bases of operation are in

YMFG maintains sufficient allowances against non-performing

Yamaguchi Prefecture, Hiroshima Prefecture and the city ofloans to maintain the soundness of its assets. However,

Kitakyushu, the Group’s operations tend to be particularly

YMFG’s non-performing loans and credit expenses could

affected by regional economies. Conditions in those regional

increase as the result of economic movements in Japan andeconomies could therefore have a negative impact on YMFG’s

the local community, fluctuations in real estate values andoperating performance.

share prices, and the management status of recipients of
YMFG’s financing. Such factors could have a negative effect

2. Capital Adequacy Ratioon operating performance and reduce equity capital.

As YMFG has overseas bases, it calculates a consolidated

To date, YMFG has worked diligently to move non-capital adequacy ratio according to uniform international

performing loans off the balance sheet, to write off

standards as provided by “standards for determining whether

non-performing loans appropriately, and to post sufficienta bank holding company’s equity capital is sufficient, after

allowances for doubtful accounts. However, the Group could

taking into account assets held by the bank holding company

face larger-than-expected losses when disposing of non-and its subsidiary companies, based on the provisions ofperforming loans or incur higher-than-expected amortization.

Article 52-25 of the Banking Act” (Financial Services Agency
Notification No. 20 of 2016).

(2) Allowance for Doubtful Accounts

Yamaguchi Bank, a YMFG subsidiary, calculates its non-In accordance with predetermined standards, YMFG posts anconsolidated capital adequacy ratio according to uniform

allowance for doubtful accounts using expected losses based

international standards based on “standards for determining

on past loan loss ratios. However, actual losses may differ

whether a bank’s equity capital is sufficient, after taking intofrom the amounts expected when the allowance for doubtful

account assets held by the bank, based on the provisions ofaccounts is posted. As a result, actual losses could significantly

Article 14-2 of the Banking Act” (Financial Services Agency

exceed expected losses, resulting in an insufficient allowance

Notification No. 19 of 2016).

for doubtful accounts.

Under uniform international standards (Basel 3), theFurthermore, worsening overall economic conditions,consolidated capital adequacy ratio must be maintained at 8%

declines in collateral values and other unexpected factors may

or higher, the Tier 1 ratio at 6% or higher and the Tier 1 ratio

require the Group to revise its set standards and expectedon common shares at 4.5% or higher (as of the end of thelosses, resulting in the need to increase the allowance forconsolidated fiscal year under review).

doubtful accounts.

Momiji Bank and Kitakyushu Bank calculate their nonconsolidated capital adequacy ratios according to domestic(3) Loans by Business Category, Geographic Region andOther Factors
From a risk management perspective, YMFG conducts credit

15standards, based on Financial Services Agency Notification No.
19 of 2016.
Domestic standards require a bank to maintain a capitalmanagement of its portfolio by rating level, business category,adequacy ratio of 4% or higher (as of the end of thescale, region and other factors.

consolidated fiscal year under review).

YMFG Annual Report 2019

If the capital adequacy ratio falls below the above-statedbond and other investments, and interest rates on deposits—astandards, the regulatory authorities may order a bank tofunding method. Mismatches between the amount and timing

discontinue all or part of its operations.

of asset investments and funding, as well as unforeseeninterest rate fluctuations, may have a negative effect on(1) Deferred Tax Assets

YMFG’s operating performance and financial condition.

As of the end of the consolidated fiscal year under review,
Japanese accounting standards allow companies to record
deferred tax assets as expected tax benefits to be realized in
the future.

4. Risk of Price Fluctuations on Holdings of Available-forSale Securities
YMFG has substantial holdings of marketable, available-for-Uniform international standards (Basel 3) allow deferredsale securities for investment purposes. Broad-based andtax assets related to temporary differences to be included

large-scale price declines may engender impairments orin equity capital, up to a certain limited amount, and YMFG

valuation losses on holdings of available-for-sale securities,

includes in equity capital an amount calculated in accordance

which could have a negative effect on YMFG’s operatingwith Financial Services Agency Notification No. 28 of 2012.

performance and financial condition and lower the capitalAs the balance sheet amount of deferred tax assets is based

adequacy ratio.

on various forecasts and assumptions, including those related
to future taxable income, YMFG may reduce deferred tax

5. Risk Related to Pension Obligations

assets if it decides that all or part of these deferred tax assets

Decreases in the market value or investment yield of YMFG’scannot be recovered. Such a reduction would have a negative

pension assets or changes in the base rate used for calculating

impact on YMFG’s operating performance and cause theretirement benefit obligations can result in losses. Also,

capital adequacy ratio to decrease.

changes in pension plans can incur amortization expenses onpast service obligations. In addition, changes in the interest(2) Total Accumulated Other Comprehensive Income

rate environment and other factors can have a negative impact

Under uniform international standards (Basel 3), the entire

on the unfunded portion of retirement benefit obligations.

amount of total accumulated other comprehensive income
is included in common stock and other Tier 1 capital.

6. Risk of Credit Rating Being Lowered

Momiji Bank and Kitakyushu Bank, which apply domestic

If rating agencies were to lower their ratings, YMFG could

standards (Basel 3), include amounts equivalent to 45% of

be required to engage in transactions under unfavorable

land revaluation differences in 50% of equity capital underconditions or become unable to engage in certaintransitional measures provided by Financial Services Agency

transactions. This situation could have a negative impact on

Notification No. 6 of 2013.

YMFG’s operating performance and financial condition.

Accordingly, decreases in valuation differences on otheravailable-for-sale securities due to fluctuations in share prices

7. Complianceand interest rates, as well as declines in land revaluation

To encourage all executives and employees to reinforce thedifferences in line with impairment or sale, can cause thecompliance system, each year YMFG formulates compliancecapital adequacy ratio to decrease.

program practice items and undertakes a variety of initiatives.
However, if a compliance-related problem were to arise, it

3. Interest Rate Risk

could cause direct losses as well as resulting in the loss of trust

YMFG, which engages mainly in banking operations, isamong customers cultivated over many years. As a result,affected by fluctuations in market interest rates throughYMFG’s operating performance could be negatively affected.

interest on loans—an asset investment method, yields on

YMFG Annual Report 201916

8. Holding Company Risk

(4) Risk Related to Outflows of Customer Information

Being a bank holding company, the majority of YMFG’sYMFG retains significant information about customer deposits

earnings come from the dividends paid by its wholly owned

and loans that should not be leaked outside. The Group has

subsidiaries, Yamaguchi Bank, Momiji Bank and Kitakyushu

in place measures to prevent outside incursions of its onlineBank. Under certain conditions, the Banking Act or theand other systems. However, unexpected circumstances could

Companies Act may restrict the amounts that Yamaguchi

result in outflows of such information. The Group stringently

Bank, Momiji Bank and Kitakyushu Bank can pay as dividends

manages information printed on paper or stored in electronic

to YMFG. In addition, Yamaguchi Bank, Momiji Bank andmedia in accordance with information asset management

Kitakyushu Bank may become unable to pay dividends toregulations, but such information could be leaked outside theYMFG due to the insufficient posting of earnings. TheirGroup by people with malicious intent or as the result of theinability to pay dividends to YMFG could render YMFG unablemishandling of information. Such situations could call intoto pay dividends.

question the Group’s social responsibility and result in claimsof compensation for damages.

9. Other Risks(1) Liquidity Risk

(5) Reputational Risk

YMFG raises the majority of its funds through deposits

Negative news reports and rumors about YMFG and theand is therefore able to manage funds provided through afinancial industry, whether true or not, could negatively

stable source of funding. However, inconsistencies between

affect YMFG’s operating performance, financial condition

investment and funding or unexpected outflows of funds

and share price.

could hinder funding, rendering YMFG unable to fulfill its
payment obligations on their settlement dates. Alternatively,(6) Risk of Regulatory Change

YMFG may be compelled to raise funds at substantially higher

As a bank holding company, YMFG is subject to restrictions

interest rates than usual, thereby generating losses.

and supervision under the Banking Act and is boundto operate within the restrictions in place as of the end(2) Operational Risksof the consolidated fiscal year under review (including

YMFG faces operational risks in the course of its operations.

laws, regulations, policies and conventional practices).

These risks include internal fraud, external fraud, workplace

Consequently, future regulatory changes could negatively

improprieties (such as acts that conflict with laws andaffect YMFG’s execution of operations, operating performance

regulations), the improper handling of customer transactions

and capital adequacy ratio.

(including violations of obligations and problems with productdesigns), natural disasters, accidents, system failures, customer(7) Risks Related to External Factors

relations, the inappropriate handling of transactions andExternal factors such as natural disasters (including

unsatisfactory process management. Such issues with businessearthquakes, storm and flood damage, and contagious

operations could result in losses and have a negative impact

diseases), man-made disasters (including terrorism andon YMFG’s operating performance and financial condition.

cybercrime) and technological disasters (including electricaloutages and computer trouble), could result in damage(3) Risk Related to Significant Legislation

to YMFG’s head office, branches and other locations,YMFG strives to ensure thorough compliance and isthreatening YMFG’s ability to continue all or part of its

reinforcing its system for preventing violations of laws andoperations and significantly affecting YMFG’s operations. As

regulations. Nevertheless, YMFG could become subject toa result, YMFG’s operations and financial conditions could belawsuits due to violations of laws and regulations in its various

negatively affected.

operations. Such situations could negatively affect YMFG’soperating performance and financial condition.

17

YMFG Annual Report 2019