Bank of Iwate : Annual Report 2023

Annual Report

2023

The Bank of Iwate,Ltd. Annual Report

Top Message

1 Management Policy, Business Environment, and Issues to be Addressed

1. Management Policy

Since its establishment in May 1932, The Bank of Iwate, Ltd. (the "Bank") has been maintaining its two basic positions of contributing to the development of the regional community and ensuring financial soundness of the Bank under all circumstances as its fundamental mission objectives.

2. Business Environment

The current business environment surrounding regional financial institutions is characterized by the decline of traditional business models that depend on deposits and loans due to prolonged low interest rates, as well as the need to respond to changes such as the entry of companies from other industries and the expansion of online banking. In addition, the environment is changing at a dizzying pace and is difficult to predict, as efforts to address climate change are becoming increasingly global, prices of food, fuel, materials, and other items are rising, and new technologies such as the cashless system and AI are developing.

In Iwate Prefecture, the Bank's main base of operations, we are seeing an increase in business closures and dissolutions and a decline in business establishments because of population outflow to urban areas, shortage of workers, and lack of successors, and these challenges are manifesting and becoming even more serious.

On the other hand, Iwate Prefecture, in addition to its rich natural environment, is one of the few prefectures that maintain a food self-sufficiency rate of more than 100%, and its presence as a production and supply base for food and energy is growing.

Moreover, in the southern part of the prefecture, industrial hubs of semiconductor and automobile industries have been growing, while in the northern part of the prefecture, moves toward the realization of a regional recycling and symbiosis zone utilizing regional energy, forests, and marine resources are accelerating. In this way, industrial structural change and socioeconomic transformation is underway throughout the prefecture. In terms of tourism, Iwate Prefecture has a great deal to offer, with three World Heritage sites registered, the most of any prefecture in Japan, and Morioka City, the prefectural capital, selected by the New York Times as one of "52 Places to Visit in 2023."

3. Issues to be Addressed

(1) Long-term vision

Under these circumstances, the Bank has formulated its new long-term vision for the next 10 years, starting in FY2023, as becoming "a company of value co-creation that will solve our customers' issues and drive the sustainable growth of the local community." This long-term vision is based on our picture of what an ideal community should be for locals and our customers, in terms of liveliness and security, presence of attractive companies, and a financial infrastructure that is both familiar and convenient, and embodies how the Group wishes to be in order to realize this concept.

The Group, while coordinating with regional business operators and local governments, will not only seize opportunities created by the industrial structural change, but will also leverage the strengths of Iwate's unique regional resources, such as renewable energy, agriculture, forestry and fisheries, and tourism, to further draw out its potential, thereby generating new value for the region and realizing a rich, vibrant, and sustainable regional society.

(2) New Medium-term Management Plan

Overview of the New Medium-term Management Plan

To realize our long-term vision, we launched the 21st Medium-Term Management Plan - Regional Value Co- Creation Plan - (the "Plan") covering the three years from April 2023. Adhering to the philosophy of CSV (creation of shared value), the Plan positions the next three years as a period to deepen the financial services domain and take on the challenge of new business areas that go beyond the framework of finance, based on the management foundation that has been built up through the improvement of the Group's foundation and business restructuring that were undertaken in the previous medium-term management plan. As the first phase of achieving our long-term goals of ¥10.0 billion in consolidated net income and 5% ROE, we will create a profit growth trajectory through the effective use of our high level of equity capital and the transformation of our business portfolio.

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Basic Policies of the Plan

As a period for creating an evolved form of finance that supports the community, the Plan consists of the following three basic policies.

Basic Policy I: Advancement of social solution business

The Bank will build a system capable of leading the revitalization and development of local economies and providing a comprehensive range of solutions while maximizing our core business of the financial intermediary function. Additionally, we will provide high value-added financial services through the use of high-quality data and cross-industry collaboration, while expanding our business portfolio to include local decarbonization efforts and new business areas.

Basic Policy II: Establishment of a solid management foundation to support the region

We will strengthen our asset business by optimizing capital allocation, improve management efficiency through DX promotion, and decisively implement business restructuring and cost structure reforms. In addition, based on the current comprehensive financial group structure, we will form a new group of companies that will support the region's cyclical economy, emphasize dialogue with stakeholders, and establish a high level of corporate governance.

Basic Policy III: Create an organization in which diverse human resources can continue to work in a rewarding environment

In addition to actively investing in human resources so that we may nurture professional human resources capable of solving local issues and promote individual growth, we will strive to create an organization in which all employees can continue to have pride and job satisfaction and work with peace of mind by instilling a corporate culture with motivating challenges.

Key Performance Indicators (New Medium-Term Management Plan, Long-term Targets)

As the first phase toward achieving our long-term targets, we have set the following major numerical targets and will work on various measures.

Indicator	FY2022	FY2025	Long-term targets
results	targets	(up to FY2032)
Consolidated net income	¥5.3 billion	¥7.0 billion	¥10.0 billion
Consolidated ROE (based on shareholders' equity)	3.0%	Over 4.0%	Over 5.0%
Consolidated capital ratio	11.64%	Around 10%	-
OHR (non-consolidated)	74.8%	60% levels	-
Customer service business profit	(¥900 million)	Over ¥1.0 billion	-

2 Our Stance on Sustainability and Initiatives Thereof

Below is a description of the Group's stance on sustainability and the initiatives thereof.

1. Sustainability Policy

With the aim of realizing sustainable local communities, The Bank of Iwate Group (hereinafter referred to as "the Group") is committed to creating common environmental, social, and economic value with all stakeholders, including local communities, customers, shareholders, investors, and the Group's employees, through our business activities, while respecting the rights and positions of all.

1. Create a virtuous cycle of "regional economic development" and "enhancement of the corporate value of the
   Group" through business activities that contribute to solving various issues faced by the community and our business partners.
2. Develop and provide high quality financial functions answering the needs of our customers and local communities, and fulfill our Group's mission of revitalizing local economies and enriching people's lives.
3. As a corporate group with its main base of operations in Iwate Prefecture, which has a rich natural environment, we will practice environmentally-friendly management and aim to achieve both economic growth and environmental preservation.
4. All employees shall perform their duties with high ethical standards, with the aim of establishing a higher level of corporate governance system, such as improving management transparency and strengthening supervisory functions.
5. Based on the recognition that human resources are the source of all value, we will create an environment in which each employee can maximize his/her abilities and realize a work style that respects diversity, personality, and individuality.
6. We will strive to actively and fairly disclose management information and respond to the expectations and trust of our stakeholders through continuous and constructive dialogue.

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2. Materiality

In order to realize our new long-term vision toward the 100th anniversary of our founding in 2032, we have identified three growth areas as materiality: "regional development and support for the growth of regional industries," "providing services and value through the use of data," and "leading and innovative responses toward the realization of a decarbonized society." We have also identified "building an organization that maximizes the value of human resources" and "enhancement our corporate governance structure" as the management foundations that will support these areas.

3. Governance

(1) Establishment of the Sustainability Promotion Committee

In August 2021, the Bank endorsed the TCFD (Task Force on Climate-related Financial Disclosures) recommendations to analyze and assess the risks and opportunities that climate change poses to our customers and the Bank, and to achieve carbon neutrality in our community. In August 2022, we established the Sustainability Promotion Committee to facilitate our response to the TCFD recommendations and to contribute to the realization of a sustainable community through discussion and progress management of basic policies and measures related to ESG management.

(2) Sustainability-related meetings held by the Committee and the Board of Directors (August 2022 - March 2023)

Date	Meeting	Main Matters Discussed, Reported Matters, etc.
		Items related to sustainability management system, disclosure items
		related to climate change response, scope and method of CO2 emissions
October 19	1st committee	measurement, method of physical risk and transition risk scenario
meeting	analysis, proposed financing policy for specific sectors, policy for
		sustainable finance initiatives, and local decarbonization support
		measures
January 23	2nd committee	Discussion items from each subcommittee regarding TCFD response,
development of sustainability policy, response regarding human capital
meeting
	disclosure, and roadmap for promotion
		Status of Sustainability Promotion Committee meetings and discussion
		content, sustainability policy draft, the Group's greenhouse gas (GHG)
February 24	Board of	reduction policy, methodology and disclosure policy for climate change
Directors meeting	risk analysis, draft policy for lending to specific sectors, policy for
		sustainable finance initiatives, measures to support decarbonization in
		the region, and policy on response to the disclosure of human capital
March 23	Board of	Discussion and decision on the development of policies related to
sustainability and the establishment of goals related to addressing
Directors meeting
	climate change
―	Subcommittee	A total of 26 subcommittee meetings in assembly format have been
held.

4. Environmental and social issues

(1) Risk management a. Transition risk

The Bank recognizes that there are risks related to the transition to a decarbonized society in all sectors, not just those sectors of carbon-related assets that are generally considered to have relatively high direct or indirect GHG emissions.

We believe that there are short-,medium-, and long-term risks affecting the financial aspects of the Bank and other companies in terms of policy, regulation, technology, markets, and reputation. For example, the occurrence or increase of carbon taxes and other payments without a reduction in GHG emissions; capital investment and new technologies for decarbonization becoming necessary; and consumers no longer using conventional products and services due to a higher awareness of how these may impact the environment and society.

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Against this backdrop, we have calculated the risk amount for the electricity sector, which is expected to be most affected by decarbonization, based on the credit situation at the Bank. The Net Zero Emissions (NZE) by 2050: 1.5℃ Scenario developed by the IEA (International Energy Agency) was used for this calculation.

As a result of this analysis, the cumulative impact of transition risk on credit costs is expected to increase by ¥700 million.

b. Physical risk

The Bank recognizes acute and chronic physical risks in line with global warming, including higher frequency of extreme events such as floods, strong winds, heat waves, and snow damage, as well as an increase in average temperatures and rise in sea level. If these risks manifest, there is concern they will affect the financial aspects of the Bank and other companies due to loss of real estate collateral and business suspensions.

Therefore, we calculated the amount of risk based on the IPCC 4°C scenario, which assumes that a once-in-a- century flood will occur within the next 25 years, assuming damage to mortgaged buildings located in Iwate Prefecture and that corporations in Iwate Prefecture will be forced to suspend their business operations.

As a result of this analysis, the impact of physical risk on credit costs is expected to increase by up to ¥1.5 billion.

c. Response

The Bank plans to manage climate-related risks in an integrated manner, including setting up discussion topics in the Sustainability Promotion Committee and ALM Committee based on the status of carbon-related assets, GHG emissions (especially Scope 3 Category 15 "Investments and Loans"), transition risk, and physical risk.

1. Calculation of indicators, etc. relating to GHG a. Carbon-related assets
   Carbon-related assets are generally defined as assets or organizations with relatively high direct or indirect GHG emissions. Accordingly, the Bank considers assets associated with the following sectors to be carbon-related assets.

			(Millions of yen)
Sector	Item	FY2021	FY2022
	Amount	48,233	57,655
Energy
Percentage of loans	2.47%	2.85%
	outstanding
	Amount	72,125	62,327
Transportation
Percentage of loans	3.69%	3.08%
	outstanding
Materials, buildings and	Amount	261,928	277,099
Percentage of loans
capital goods	13.43%	13.73%
	outstanding
Agriculture, food and	Amount	64,298	67,382
Percentage of loans
forest products	3.29%	3.33%
	outstanding
Total carbon-related assets		446,584	464,465
Percentage of loans outstanding	22.90%	23.01%

b. GHG emissions

In collaboration with the Sustainability Promotion Committee's subcommittee on greenhouse gas control and Zeroboard Inc., a company that provides a cloud service to calculate and visualize GHG emissions, the Bank has conducted several studies in line with the GHG Protocol regarding the scope for GHG emissions calculation, calculation method, etc. Accordingly, we have calculated and estimated GHG emissions this time as per below. All greenhouse gases are converted to CO2 (carbon dioxide).

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