Nanto Bank : ②Independent Auditors’ Report (204kb)

Financial Data

Independent Auditors' Report

Independent auditor's report

To the Board of Directors of The Nanto Bank, Ltd.:

Opinion

We have audited the accompanying consolidated financial statements of The Nanto Bank, Ltd. ("the Company") and its consolidated subsidiaries (collectively referred to as "the Group"), which comprise the consolidated balance sheets as at March 31, 2022 and 2021, the consolidated statements of income, comprehensive income, changes in net assets and cash flows for the years then ended, and notes, comprising a summary of significant accounting policies and other explanatory information.

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at March 31, 2022 and 2021, and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with accounting principles generally accepted in Japan.

Basis for Opinion

We conducted our audit in accordance with auditing standards generally accepted in Japan. Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Group in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Japan, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

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Financial Data

Independent Auditors' Report

Appropriateness of the estimates of the reserve for possible loan losses for loans and bills discounted to small and medium-sized enterprises (SMEs)

The key audit matter	How the matter was addressed in our
	audit
The Nanto Bank, Ltd. ("the Company") and its	The primary procedures we performed to
consolidated subsidiaries reported loans and bills	assess whether the Company's estimates
discounted of ¥3,870,774 million, accounting for 55.2% of	of the reserve for possible loan losses for
total assets, and a related reserve for possible loan losses	loans and bills discounted to SMEs was
of ¥22,059 million in the consolidated balance sheet.	appropriate included the following:
Reserve for possible loan losses reported in the balance
sheet of the Company accounted for a significant portion
in the consolidated balance sheet.	(1) Internal control testing
As described in the Notes to Consolidated Financial	In order to test the design and operating
effectiveness of certain of the Company's
Statements, 2 SUMMARY OF SIGNIFICANT
internal controls relevant to the
ACCOUNTING POLICIES i. Reserve for possible loan
determination of the category of
losses and 3 SIGNIFICANT ACCOUNTING
borrowers, we:
ESTIMATES, the Company classifies borrowers based on
their credit risk rating in accordance with the	• tested the effectiveness of internal
predetermined standards for write-offs and reserves, and	controls related to various
reports the reserve for possible loan losses by calculating	regulations for the internal self-
the loan loss ratio based on the category of borrowers by	assessment criteria, and the policy
region.	for write-offs and provisions;
The category of borrowers is determined based on the	• tested the effectiveness of internal
controls to ensure the reliability of
credit rating determined by the rating models and the	borrowers' financial information
borrower's repayment ability based on their substantial	entered into the financing support
financial position, financing capacities, and profitability,	system;
etc., and the terms and conditions of the loans and	• tested IT application controls over
payment status of the borrower. Also, the Company gives	the quantitative determination of
the category of borrowers; and
comprehensive consideration to the borrower's
• tested the effectiveness of internal
sustainability, projected profitability, and ability to pay
controls of the Credit Analysis
obligations based on their annual repayable amount,
Division related to the
appropriateness of their management improvement plans,
determination of the category of
and other factors in light of the borrower's industry
borrowers in consideration of
characteristics.	qualitative factors.
	(2) Assessment of determination of the
The Company aims to increase Nara prefecture's real	category of borrowers
gross domestic product by 10% over 2016 in its	In order to assess the appropriateness of
management plan, "Nanto Mission and Objectives for the
the determination of the category of
Next 10 Years," targeted to be achieved by 2029. To
borrowers, we selected borrowers to be
achieve this goal, the Company will take the initiative in
tested individually by considering
resolving regional economic issues and contribute to the
quantitative factors such as credit limits
development of the region by focusing on "contributing to
and qualitative factors such as the
improved productivity", "support for asset formation" and
progress of the Company's management
"facilitating commercialization."
improvement plans and the impact of the

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The Company operates mainly in Nara prefecture, neighboring prefectures, and Tokyo, but its business coverage area is limited. The main borrowers are SMEs, and the Company's balance sheet reported loans and bills discounted to SMEs of ¥1,446,580 million.

Since the fundamental business foundation of SMEs generally tends to be weaker than medium to large-sized enterprises, the Company determines the category of SME borrowers by comprehensively considering not only their financial conditions but their technical capabilities, sales capacity and growth potential, their managements' income status, asset quality, and guarantee status and capacity, in light of their business condition.

Therefore, there is judgment over the qualitative factors including the estimate of reasonableness and feasibility of the management improvement plan which is important for borrowers categorized as needs attention borrowers (excluding claims corresponding to restructured loans) based mainly on the grounds that a drastic and highly feasible or a reasonable and highly feasible management improvement plan exists.

In addition, SMEs are still significantly impacted by the deterioration of the local economy due to the spread of the new coronavirus. Accordingly, management's judgment on the determination of the category of borrowers may have a significant impact on the reported amount of the reserve for possible loan losses.

We, therefore, determined that our assessment of the appropriateness of the estimates of the reserve for possible loan losses for loans and bills discounted to SMEs, especially the appropriateness of the management's judgment on the category of borrowers, was of most significance in our audit of the consolidated financial statements for the current fiscal year, and accordingly, a key audit matter.

spread of the new coronavirus, and

performed the following procedures:

• compared the quantitative information of borrowers, including financial ratios, to the supporting materials;
• inspected related documents and inquired of personnel in the relevant divisions, such as the Credit Analysis Division, to assess whether judgments based on qualitative factors were made in a timely and appropriate manner, and assessed the appropriateness of the determination of the categories of borrowers based on qualitative factors for borrowers whose category have a relatively high degree of dependence on management's judgment, particularly including those under intensive credit monitoring and those categorized as needs attention borrowers (excluding claims corresponding to restructured loans) based mainly on the grounds that a drastic and highly feasible or a reasonable and highly feasible management improvement plan exists; and
• assessed whether the determined categories of borrowers were appropriate, focusing on the recoverability from the current business performance and financing situation by understanding the latest business conditions of borrowers and considering their industry characteristics through the inspection of related documents and the inquiries of personnel in the relevant divisions, such as the Credit Analysis Division, to evaluate the impact of the spread of the new coronavirus on borrowers' operating results.

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Financial Data

Independent Auditors' Report

Other Information

The other information comprises the information included in the the Annual Report, but does not include the consolidated financial statements, the financial statements, and our auditor's reports thereon. Management is responsible for the preparation and presentation of the other information. Corporate auditors and the board of corporate auditors are responsible for overseeing the directors' performance of their duties with regard to the design, implementation and maintenance of the reporting process for the other information.

Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon.

In connection with our audit of the consolidated financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated.

If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact.

We have nothing to report in this regard.

Responsibilities of Management and Corporate Auditors and the Board of Corporate Auditors for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in Japan, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, management is responsible for assessing the Group's ability to continue as a going concern, disclosing, as applicable, matters related to going concern in accordance with accounting principles generally accepted in Japan and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so.

Corporate auditors and the board of corporate auditors are responsible for overseeing the directors' performance of their duties with regard to the design, implementation and maintenance of the Group's financial reporting process.

Auditor's Responsibilities for the Audit of the Consolidated Financial Statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with auditing standards generally accepted in Japan will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

As part of our audit in accordance with auditing standards generally accepted in Japan, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

• Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from

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error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, while the objective of the audit is not to express an opinion on the effectiveness of the Group's internal control.
• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.
• Conclude on the appropriateness of management's use of the going concern basis of accounting and based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the Group to cease to continue as a going concern.
• Evaluate whether the presentation and disclosures in the consolidated financial statements are in accordance with accounting standards generally accepted in Japan, the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

We communicate with corporate auditors and the board of corporate auditors regarding, among other matters, the planned scope and timing of the audit, significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide corporate auditors and the board of corporate auditors with a statement that we have complied with relevant ethical requirements regarding independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with corporate auditors and the board of corporate auditors, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor's report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

Convenience Translation

The U.S. dollar amounts in the accompanying consolidated financial statements with respect to the year ended March 31, 2022 are presented solely for convenience. Our audit also included the translation of yen amounts into U.S. dollar amounts and, in our opinion, such translation has been made on the basis described in Note 1 to the consolidated financial statements.

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