Coverage initiated on: 2020-09-01 Research Coverage Report by Shared Research Inc. Last update: 2021-08-02

8363 Hokkoku Bank

Shared Research Inc. has produced this report by request from the company discussed in the report. The aim is to provide an “owner’s manual” to investors. We at Shared Research Inc. make every effort to provide an accurate, objective, and neutral analysis. In order to highlight any biases, we clearly attribute our data and findings. We will always present opinions from company management as such. Our views are ours where stated. We do not try to convince or influence, only inform. We appreciate your suggestions and feedback. Write to us at [email protected] or find us on Bloomberg. INDEX

Executive summary ...... 3. Key financial data ...... 5. Banking business earnings structure and glossary ...... 6. Recent updates ...... 8. Trends and outlook ...... 9. . Quarterly trends and results ...... 9. Business ...... 1.6. Bank overview ...... 1.6. Business description ...... 1.8. Business model reform process ...... 2.3. Net interest income (88.5% of non-consolidated core gross profit) ...... 2.8. Net noninterest income (16.3% of non-consolidated core gross profit) ...... 3.4. Market and value chain ...... 4. .4. Market size and trends in regional banking industry ...... 4.4. Main competitors ...... 4.8. Strengths and weaknesses ...... 5.1. Historical performance and financial statements ...... 5.4. Income statement (consolidated) ...... 5.4. Income statement (non-consolidated)     ...... 5.5. Balance sheet (consolidated)     ...... 5. 6. Balance sheet (non-consolidated) ...... 5.7. Cash flow statement ...... 5.8. Historical performance ...... 5.8. Other information ...... 6. .7. News and topics ...... 7.0. Company profile ...... 7.3.

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 2 Executive summary Business overview

Hokkoku Bank is a mid-tier regional bank with a lending share of 42.5% in Ishikawa Prefecture. The bank plans to establish a holding company, The Hokkoku Financial Holdings Co., Ltd. through a simple transfer of shares, effective October 1, 2021. Hokkoku Bank is one of the 62 regional banks classified by the Financial Services Agency (FSA), among 189 Japanese banks licensed to operate in Japan under the Banking Act. Its loans outstanding in the prefecture now stand at JPY4.3tn. The bank raises short-term funds through individual deposits and invests in long-term assets such as corporate loans and securities, earning the yield spread between long- and short-term interest rates in the form of interest income, its main source of profit. Against the backdrop of a sustained decline in its deposit-lending margins, Hokkoku Bank considers reducing general and administrative expenses and expanding noninterest income as top priorities for its Banking business. It has scaled down its branch network by just under 40%, and in May 2021 became the first Japanese bank to launch the cloud-based operation of its backbone system (core banking system that manages customer accounts). The bank is digitalizing its banking operations ahead of rivals, and strengthening its cost competitiveness in an effort to support sustainable operations.

Hokkoku Bank has been focusing on expanding noninterest income businesses (Consultation services, Bank cards, and Leasing) to offset a decline in its interest income attributable to a contraction in deposit-lending margins. At present, its net noninterest income accounts for 16.1% of core gross profit (equivalent to gross profit for companies; total of net interest income and net noninterest income), exceeding the average of 13.7% for the 64 regional banks as of FY03/20. Non- consolidated core gross profit has shown a CAGR of -1.7% over the last 10 years. Non-consolidated core operating profit (equivalent to operating profit for companies) CAGR has been -3.6%, which as of FY03/21 was still declining at a rate slower than at rivals (Hokuriku Bank: -4.1%, Fukui Bank: -9.0%).

Hokkoku Bank commenced a drastic overhaul of its business model in 2000. The objective was to create a virtuous cycle by enhancing productivity through the adoption of information and communications technology (ICT). This was expected to fuel changes in work styles, drive reforms of the personnel evaluation system, and ultimately give rise to a mindset change of employees that would further accelerate productivity improvements. The bank adopted groupware to visualize its operations and enhance productivity. It also revamped its personnel evaluation system, discarding the traditional sales quotas imposed by supervisors and introducing a system that assesses employees based on whether they achieved objectives in collaboration with their colleagues and organizations. These reforms have virtually eliminated overtime work and contributed to a change in employee mindset from the previous emphasis on meeting quotas individually to a commitment to resolving customer problems collaboratively as a team.

The reforms that started with a review of the bank’s IT systems (extending to banking office work) have been underway for two decades. They have resulted in reduction of just under 40% in branches, simplified screening processes, a transition from outsourced to in-house systems development, a move of its backbone system to an open system, and the migration of online banking (customer services) to the cloud (a banking industry first in Japan). The bank completed migration of its backbone system to a public cloud service in May 2021 (another industry first). Its labor productivity (core gross profit/number of employees) has been at a CAGR of -0.4% over the last 10 years in part due to contraction in core gross profit, but the decline has still been modest compared with rivals (Hokuriku Bank: -1.0%, Fukui Bank: -3.2%).

Hokkoku Bank aims to provide additional customer value through Consultation services, leveraging its experience from its own operational reforms and implementation of ICT solutions. It has shifted its focus from ad-hoc lending to a lending stance rooted in an understanding of the potential and future prospects of customer businesses and has started leveraging its screening expertise in Consultation services. Drawing on its experience in digitalizing business processes, it has begun offering ICT and productivity improvement consultation services through a team of 100 members (mainly excess personnel due to branch network reduction). In addition, the bank is a licensed Visa debit card issuer. It not only issues debit cards but also acts as an acquirer, providing a cashless payment method to consumers in the Hokuriku area—where adoption of cashless payments has been slow—and creating earnings opportunities for affiliated merchants. In 2016, Hokkoku Bank became the first Japanese regional bank to launch an overseas branch in Southeast Asia (Singapore) to provide support for business transactions in the region. Through its Singapore branch, the bank provides overseas support to Hokuriku-based companies seeking to expand their sales channels overseas.

Hokkoku Bank’s non-consolidated earnings (core gross profit) comprise net interest income (over 80% of core gross profit) and net noninterest income (fee income). Its income, mainly generated from lending and deposit transactions, is calculated by multiplying loans outstanding by deposit-lending margins, and interest margins are yield on loans minus yield on deposits and general and administrative expenses. While the Bank of Japan (BOJ) has maintained its negative interest rate policy, the bank’s yield on deposits has hovered around zero. As yield on deposits has no room to decline further, the ongoing

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 3 contraction in deposit-lending margins can be partly attributed to an inexorable decline in the yield on loans. The bank’s fee income (i.e., noninterest income) is a product of the customer count and fees per customer. Income in the Consultation services business is calculated as the hourly rate multiplied by the number of staff deployed, income in the Bank cards business corresponds to affiliated merchant fees (including card issuance fees), and income in the Leasing business is the product of the lease balance and lease rate.

Hokkoku Bank’s strategic decisions are dictated by the Basel III capital adequacy ratio requirements (minimum of 10.5%) specified by the Basel Committee on Banking Supervision (BCBS). To keep its capital adequacy ratio above a certain level, the bank must expand its capital at a faster pace than its assets. At the same time, increases in its capital adequacy ratio lead to a decline in ROE (because ROE = ROA x financial leverage). This means the bank needs to improve ROA to a greater extent than just what is necessary to offset the decline in ROE. To expand ROA (≂ profit/assets ≂ (gross profit/assets) x 1 - overhead ratio [OHR = general and administrative expenses/gross profit]), the bank can pursue two strategies: increase ROA itself or reduce OHR. To strengthen ROA, Hokkoku Bank is focusing on expanding income from its Consultation services, Bank cards, and Leasing businesses. To reduce OHR, it has scaled back its branches and undertaken measures to reduce costs such as migrating its backbone system to the cloud. Earnings trends

On a consolidated basis, Hokkoku Bank reported FY03/21 consolidated ordinary income of JPY79.1bn (+5.8% YoY), ordinary profit of JPY12.9bn (-2.2% YoY), and profit of JPY6.8bn (-7.6% YoY). The consolidated capital adequacy ratio (international standard) was 13.04% (+2.74pp YoY). On a non-consolidated basis, core gross profit came to JPY41.0bn (-1.5% YoY), core operating profit to JPY11.8bn (-3.2% YoY), and ordinary profit to JPY11.3bn (-5.8% YoY). The main factor pushing down profit was a 16.0% YoY increase in cost of credit to JPY11.3bn.

For FY03/22, the bank forecasts consolidated ordinary profit of JPY12.5bn (-3.0% YoY) and profit attributable to owners parent of JPY5.5bn (-18.5% YoY). On a non-consolidated basis, it forecasts ordinary profit of JPY11.5bn (+1.9% YoY) and profit of JPY5.0bn (-16.0% YoY). The forecast assumes that the impact of COVID-19 on the overall economy will continue to some extent.

Hokkoku Bank traditionally revised its medium-term business plan every three years, but unveiled a medium- to long-term management strategy that spans a five to ten-year period, which will be updated annually, when announcing FY03/21 results. The new strategy targets consolidated ordinary profit of JPY16.0bn in FY03/26 (CAGR of 4.6% from FY03/21) and JPY21.0bn in FY03/31 (CAGR of 5.1% from FY03/21), and profit attributable to owners parent of JPY10.0bn in FY03/26 (CAGR of 8.3%) and JPY13.0bn in FY03/31 (CAGR of 6.9%). The bank targets OHR in the 55–60% range (70.7% in FY03/21) and ROE of 4.5% (2.5%) in FY03/31. Strengths and weaknesses

Hokkoku Bank’s strengths are 1) distinct measures to stay ahead of rivals through the early adoption of digital and cloud solutions to streamline operations, 2) growth in noninterest income businesses driven by Consultation services, and 3) successfully avoiding labor productivity decline by consistently enhancing productivity and strengthening noninterest income. Its weaknesses are 1) its vulnerability to structural declines in demand as the population contracts in its core market, the three Hokuriku prefectures, 2) its slow progress in enhancing credit risk management among internationally active banks, and 3) a lack of diversity in personnel recruiting.

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 4 Key financial data

Income statement FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 FY03/22 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Est. Consolidated ordinary income 70,160 69,314 66,573 74,109 74,686 67,413 68,633 67,114 74,740 79,098 Non-consolidated ordinary income 58,524 58,248 55,409 63,162 64,125 56,729 57,693 56,610 64,050 68,414 Non-consolidated core gross profit 48,669 46,951 46,384 47,162 46,414 43,949 45,041 41,509 41,584 40,954 Non-consolidated core operating profit 18,270 17,098 16,606 16,856 17,974 15,142 16,694 13,253 12,162 11,778 12,000 Consolidated ordinary profit 14,865 14,123 16,798 18,941 17,601 15,867 16,367 14,165 13,181 12,890 12,500 Profit attributable to owners of parent 6,314 6,994 7,855 7,989 9,569 10,851 10,163 8,583 7,310 6,752 5,500 Per-share data (split-adjusted Shares issued ('000) 32,740 31,740 31,460 31,460 29,990 29,990 29,990 29,110 29,110 28,115 EPS 190.0 216.9 249.8 255.4 314.5 362.5 346.4 296.8 255.6 241.5 196.6 EPS (fully diluted) 189.7 216.5 249.2 254.8 313.6 361.3 Dividend per share 60.0 60.0 70.0 70.0 80.0 90.0 90.0 80.0 70.0 80.0 70.0 Book value per share 6,223.9 6,657.5 6,835.4 7,829.4 7,524.0 8,138.8 9,029.6 9,106.3 8,361.4 9,954.4 Consolidated balance sheet (JPYmn) Cash and due from banks 55,927 77,445 160,303 544,907 467,351 748,544 1,094,772 1,221,400 1,389,813 1,483,423 Securities 902,333 886,272 893,006 1,190,527 1,018,148 1,104,367 1,060,597 1,088,790 990,091 1,198,610 Loans and bills discounted 2,265,382 2,322,999 2,350,504 2,355,374 2,328,285 2,315,444 2,402,114 2,567,333 2,599,328 2,614,865 Lease receivables and investment assets 21,588 21,495 22,812 21,672 21,741 25,160 29,602 33,335 36,532 35,846 Property, plant and equipment 35,511 33,551 37,368 38,301 36,923 35,223 34,155 32,804 31,414 31,428 Intangible assets 3,036 3,834 7,589 8,970 8,866 8,315 9,385 10,097 11,122 12,108 Total assets 3,405,627 3,487,404 3,513,777 4,179,790 3,904,020 4,320,364 4,772,893 5,029,226 5,097,268 5,524,513 Deposits 2,958,403 3,011,013 3,049,886 3,079,447 3,086,299 3,185,984 3,362,662 3,538,022 3,634,904 3,969,004 Call money and bills sold 195 12,659 324,605 67,916 293,334 696,969 847,399 981,819 718,694 Total liabilities 3,195,850 3,268,911 3,290,339 3,932,060 3,669,000 4,068,006 4,504,115 4,758,010 4,856,502 5,238,244 Adjusted shareholders' equity 171,875 175,276 180,620 182,882 188,353 198,706 201,734 207,876 210,266 215,077 Shareholders' equity 203,390 211,089 214,904 238,433 225,508 243,969 261,121 263,329 233,592 278,463 Total net assets 209,777 218,492 223,438 247,730 235,020 252,358 268,777 271,215 240,765 286,269 Total liabilities and net assets 3,405,627 3,487,404 3,513,777 4,179,790 3,904,020 4,320,364 4,772,893 5,029,226 5,097,268 5,524,513 Consolidated equity ratio 6.0% 6.1% 6.1% 5.7% 5.8% 5.6% 5.5% 5.2% 4.6% 5.0% Cash flow statement (JPYmn) Cash flows from operating activities 14,973 -8,211 73,257 637,701 -218,579 324,491 290,627 140,604 110,694 191,877 Cash flows from investing activities -820 34,841 12,420 -247,118 143,804 -41,647 63,755 -12,320 61,370 -127,274 Cash flows from financing activities -19,869 -5,133 -3,249 -5,791 -3,945 -3,243 -8,884 -2,627 -5,852 18,342 Financial ratios (non-consolidated) Deposits and negotiable certificates of 3,107,913 3,164,634 3,174,562 3,155,196 3,188,655 3,306,839 3,452,266 3,614,553 3,712,689 4,052,046 deposit Loans and bills discounted 2,274,730 2,331,905 2,358,615 2,363,132 2,335,593 2,324,495 2,412,919 2,582,965 2,617,944 2,633,905 Loan-to-deposit gap 833,183 832,729 815,947 792,064 853,062 982,344 1,039,347 1,031,588 1,094,745 1,418,141 Loan-to-deposit ratio 73.2% 73.7% 74.3% 74.9% 73.2% 70.3% 69.9% 71.5% 70.5% 65.0% Securities-to-deposit ratio 29.01% 27.98% 28.06% 37.66% 31.88% 33.33% 30.63% 30.05% 26.62% 29.51% Dependency on securities investment 22.15% 21.05% 21.01% 25.03% 26.90% 26.94% 33.23% 31.95% 24.83% 22.47% Cash reserve ratio 4.15% 5.63% 5.53% 17.27% 14.65% 23.54% 33.29% 33.79% 37.43% 36.61% Overhead ratio (core gross profit-based) 62.46% 63.58% 64.20% 64.26% 61.27% 65.54% 62.94% 68.07% 70.75% 71.24% ROA (ordinary profit-based) 0.40% 0.35% 0.42% 0.45% 0.41% 0.34% 0.33% 0.26% 0.24% 0.21% ROE 6.80% 5.86% 7.03% 7.63% 7.20% 6.01% 5.93% 4.98% 4.94% 4.54% Profit ratio of customer services 0.35% 0.29% 0.25% 0.18% 0.19% 0.15% 0.12% 0.13% 0.09% 0.04% Credit cost ratio 0.18% 0.25% 0.07% 0.32% 0.25% 0.05% 0.06% 0.12% 0.37% 0.43% Lending margin (after credit costs) 1.36% 1.17% 1.27% 0.96% 1.03% 1.16% 1.04% 0.89% 0.63% 0.52% Yield on loans (year-end balance-base) 1.55% 1.42% 1.34% 1.28% 1.27% 1.21% 1.10% 1.02% 1.00% 0.95% Total capital adequacy ratio 13.62% 13.69% 13.06% 11.72% 12.98% 12.60% 12.32% 11.78% 10.30% 13.04% (consolidated) Tier 1 ratio (consolidated) 11.62% 11.79% 11.76% 11.24% 9.65% 11.41% CET1 ratio (consolidated) 11.61% 11.78% 11.76% 11.23% 9.65% 11.40% Risk-weighted assets 1,394,738 1,413,743 1,524,966 1,711,241 1,788,624 1,912,390 2,126,757 2,243,467 2,294,518 2,323,363

Source: Shared Research based on bank data Notes: Loan-to-deposit ratio = loans outstanding/(deposits + negotiable certificates of deposit + bonds) Securities-to-deposit ratio = securities/(deposits + negotiable certificates of deposit + bonds) Core gross profit = net interest income + net fees and commissions + net trading income + net other operating income - net gains/losses on bonds Core operating profit = core gross profit - general and administrative expenses, etc. Yield on loans = interest on loans and discounts/average loans outstanding Yield on securities = interest and dividends on securities/average balance of securities Yield on interest-earning assets = interest income/average balance of interest-earning assets Yield on deposits = (deposits + negotiable certificates of deposit + bond interestan>/(deposits + negotiable certificates of deposit + average balance of bonds) Total cost of funding = (interest expenses + general and administrative expenses>average balance of ) Total cost of funding = (interest-bearing liabilities OHR = general and administrative expenses/core gross profit The bank conducted a 1-for-10 reverse stock split with an effective date of October 1

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 5 Banking business earnings structure and glossary

Source: Shared Research based on bank data

Glossary

Gross profit = Net interest income + Net fees and commissions + Net trading income + Net other operating income

Core gross profit = Net interest income + Net fees and commissions + Net trading income + Net other operating income - Net gains/losses on bonds

Net interest income: The difference between interest income generated by investing funds (interest on loans and discounts and interest and dividends on securities generated by investing deposits and other funds in loans and securities), and interest expenses paid to raise funds (e.g. interest on deposits).

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 6 Net fees and commissions: Fees and commissions minus fees and commissions payments. Net fees and commissions, earned when the bank provides services, are the difference between fees and commissions collected for services offered by the bank (such as fund transfer, investment trust sales, insurance sales, and arrangement of syndicated loans), and the expenses needed to provide such services. It includes fees and commissions on domestic and foreign exchanges (the largest component), fees and commissions on fund transfers for individuals or companies (including syndicated loan arrangement fees and ATM usage fees), fees and commissions earned in the investment banking business (including for M&A), and fees and commissions on sale of investment trusts and insurance products at bank branches.

Net trading income: Net income from trading accounts (designated for trading purposes) that aim to generate capital gains from short-term fluctuations in securities or currency exchange market prices (including derivatives transactions and foreign exchange transactions such as forward foreign exchange contracts) or from variation among markets. Net trading income is the difference between income and expenses directly related to transactions in trading accounts. This is a separate account to record results from transactions that are distinct from non-trading operations such as lending and deposits. Trading income mainly comes from gains realized through operations with trading accounts such as market transactions (such as securities) and derivatives transactions. Trading expenses, which are expenses incurred in trading account operations, roughly correspond to losses incurred on market transactions of securities and derivatives transactions. Hokkoku Bank does not operate trading accounts, so it does not record trading income or trading expenses.

Net other operating income: Profits other than net interest income or net fees and commissions. This includes gains/losses on sale of bonds such as government bonds held for investment purposes (net gains/losses on bonds) and gains/losses from foreign exchange and bonds trading (sales/purchase of foreign currencies). Net gains/losses on bonds are generated from sale of government bonds and other bonds held. In other word, net gains/losses on bonds can be considered unusual gains/losses.

Net noninterest income = Net fees and commissions + Net trading income + Net other operating income

Core operating profit ≂ Core gross profit - General and administrative expenses

Cost of credit = Provision of allowance for general loan losses + Non-performing loans (NPL) disposal amount - Reversal of allowance for loan losses - Recoveries of written-off claims

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 7 Recent updates Q1 FY03/22 Flash Update

2021-07-30

The Hokkoku Bank, Ltd. announced earnings results for Q1 FY03/22.

Full-year FY03/21 Report Update

2021-06-15

On June 15, 2021, Shared Research updated the report following interviews with the Hokkoku Bank, Ltd.

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 8 Trends and outlook Quarterly trends and results

Consolidated quarterly results

Cumulative (consolidated) FY03/20 FY03/21 FY03/22 FY03/22 FY03/22 (JPYmn) Q1 Q1–Q2 Q1–Q3 Q1–Q4 Q1 Q1–Q2 Q1–Q3 Q1–Q4 Q1 % of Est. 1H Est. % of Est. Init. Est. Ordinary income 22,060 39,483 58,944 74,740 22,071 42,451 62,671 79,098 26,723 YoY 20.0% 14.3% 14.4% 11.4% 0.05% 7.5% 6.3% 5.8% 21.1% Ordinary expenses 16,229 30,737 45,741 61,558 14,800 33,401 47,154 66,207 13,384 YoY 23.5% 20.8% 18.4% 16.3% -8.8% 8.7% 3.1% 7.6% -9.6% Ordinary profit 5,831 8,746 13,203 13,181 7,271 9,049 15,516 12,890 13,339 148.2% 9,000 106.7% 12,500 YoY 11.1% -3.8% 4.9% -6.9% 24.7% 3.5% 17.5% -2.2% 83.5% -0.5% -3.0% Profit 3,573 5,229 7,659 7,310 4,818 5,054 9,310 6,752 9,225 184.5% 5,000 167.7% 5,500 YoY 3.9% -10.1% -3.7% -14.8% 34.8% -3.3% 21.6% -7.6% 91.5% -1.1% -18.5% Quarterly FY03/20 FY03/21 FY03/22 (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Ordinary income 22,060 17,423 19,461 15,796 22,071 20,380 20,220 16,427 26,723 YoY 20.0% 7.8% 14.6% 1.3% 0.05% 17.0% 3.9% 4.0% 21.08% Ordinary expenses 16,229 14,508 15,004 15,817 14,800 18,601 13,753 19,053 13,384 YoY 23.5% 17.8% 13.8% 10.5% -8.8% 28.2% -8.3% 20.5% -9.6% Ordinary profit 5,831 2,915 4,457 -22 7,271 1,778 6,467 -2,626 13,339 YoY 11.1% -24.1% 27.5% - 24.7% -39.0% 45.1% - 83.5% Profit 3,573 1,656 2,430 -349 4,818 236 4,256 -2,558 9,225 YoY 3.9% -30.3% 13.6% - 34.8% -85.7% 75.1% - 91.5%

Source: Shared Research based on bank data Note: Figures may differ from bank materials due to differences in rounding methods.

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 9 Non-consolidated quarterly results

Cumulative (non-consolidated) FY03/20 FY03/21 FY03/22 FY03/22 FY03/22 (JPYmn) Q1 Q1–Q2 Q1–Q3 Q1–Q4 Q1 Q1–Q2 Q1–Q3 Q1–Q4 Q1 % of Est. 1H Est. % of Est. Init. Est. Gross profit (A) 12,645 23,963 37,546 47,538 11,718 21,316 31,711 38,727 12,591 Core gross profit (A)-(B) 11,073 20,704 31,873 41,584 10,915 20,255 30,819 40,954 11,186 YoY -6.3% -3.5% -1.2% 0.2% -1.4% -2.2% -3.3% -1.5% 2.5% Net interest income 9,524 17,550 27,027 34,876 9,337 17,163 26,305 34,259 9,586 Net fees and commissions 1,347 2,771 4,263 5,938 1,432 2,829 4,195 5,737 1,398 Net other operating income 1,773 3,642 6,255 6,723 948 1,322 1,210 -1,269 1,607 Net bond-related gains (losses) (B) 1,572 3,259 5,673 5,952 803 1,061 892 -2,226 1,405 General and administrative expenses 7,183 14,386 21,955 29,422 7,287 14,532 21,850 29,175 7,401 (C) Net OP (before provision for general 5,461 9,577 15,591 18,116 4,431 6,783 9,860 9,551 5,190 loan loss) (A)-(C) Core operating profit (A)-(B)-(C) 3,889 6,317 9,917 12,162 3,627 5,722 8,967 11,778 3,784 61.0% 6,200 31.5% 12,000 YoY -17.1% -14.1% -11.0% -8.2% -6.7% -9.4% -9.6% -3.2% 4.3% 8.4% 1.9% Core OP (ex. gains [losses] on trust 3,724 6,075 9,568 11,813 3,627 5,699 8,776 11,587 3,566 cancellation) Provision for ordinary loan loss [1] (D) -139 579 1,564 2,674 312 1,653 1,834 3,060 503 Operating profit (A)-(C)-(D) 5,601 8,998 14,026 15,441 4,118 5,130 8,026 6,491 4,687 Net bond-related gains (losses) (B) 1,572 3,259 5,673 5,952 803 1,061 892 -2,226 1,405 Nonrecurrent gains (losses) 92 -658 -1,641 -3,464 2,825 3,149 6,255 4,792 8,428 Net stock-related gains 3,125 3,541 4,192 3,975 3,400 8,317 12,249 13,239 8,871 Nonperforming loan disposal [2] 3,338 4,298 5,746 7,103 1,409 5,515 6,150 8,335 878 Reversal of provision for loan-loss [3] Gain on recovery of written-off claims 2 10 12 17 2 4 68 72 1 [4] Ordinary profit 5,693 8,339 12,385 11,977 6,943 8,279 14,281 11,283 13,115 154.3% 8,500 114.0% 11,500 YoY 16.1% -0.5% 6.2% -6.3% 22.0% -0.7% 15.3% -5.8% 88.9% 2.7% 1.9% Extraordinary income (losses) -89 -195 -559 -1,154 -58 -637 -664 -897 -54 Profit before income taxes 5,603 8,143 11,825 10,823 6,885 7,642 13,617 10,385 13,061 Income taxes 2,067 3,125 4,583 4,147 2,202 2,997 4,924 4,432 3,943 Profit 3,537 5,018 7,242 6,676 4,682 4,645 8,693 5,954 9,116 189.9% 4,800 182.3% 5,000 YoY 6.7% -9.9% -5.0% -16.8% 32.4% -7.4% 20.0% -10.8% 94.7% 3.3% -16.0% Credit cost ([1]+[2]-[3]-[4]) 3,196 4,867 7,298 9,759 1,720 7,164 7,916 11,322 1,379 YoY 186.9% 371.2% 288.8% 205.4% -46.2% 47.2% 8.5% 16.0% -19.8% Securities-related gains (incl. stock and 4,697 6,800 9,865 9,927 4,203 9,378 13,141 11,013 10,276 bonds) YoY 309.9% 241.0% 282.8% 270.3% -10.5% 37.9% 33.2% 10.9% 144.5% Quarterly (non-consolidated) FY03/20 FY03/21 FY03/22 (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Gross profit (A) 12,645 11,318 13,583 9,992 11,718 9,598 10,395 7,016 12,591 Core gross profit (A)-(B) 11,073 9,631 11,169 9,711 10,915 9,340 10,564 10,135 11,186 Net interest income 9,524 8,026 9,477 7,849 9,337 7,826 9,142 7,954 9,586 Net fees and commissions 1,347 1,424 1,492 1,675 1,432 1,397 1,366 1,542 1,398 Net other operating income 1,773 1,869 2,613 468 948 374 -112 -2,479 1,607 Net bond-related gains (losses) (B) 1,572 1,687 2,414 279 803 258 -169 -3,118 1,405 General and administrative expenses 7,183 7,203 7,569 7,467 7,287 7,245 7,318 7,325 7,401 (C) Net OP (before provision for general 5,461 4,116 6,014 2,525 4,431 2,352 3,077 -309 5,190 loan loss) (A)-(C) Core operating profit (A)-(B)-(C) 3,889 2,428 3,600 2,245 3,627 2,095 3,245 2,811 3,784 Core OP (ex. gains [losses] on trust 3,724 2,351 3,493 2,245 3,627 2,072 3,077 2,811 3,566 cancellation) Provision for ordinary loan loss [1] (D) -139 718 985 1,110 312 1,341 181 1,226 503 Operating profit (A)-(C)-(D) 5,601 3,397 5,028 1,415 4,118 1,012 2,896 -1,535 4,687 Net bond-related gains (losses) (B) 1,572 1,687 2,414 279 803 258 -169 -3,118 1,405 Nonrecurrent gains (losses) 92 -750 -983 -1,823 2,825 324 3,106 -1,463 8,428 Net stock-related gains 3,125 416 651 -217 3,400 4,917 3,932 990 8,871 Nonperforming loan disposal [2] 3,338 960 1,448 1,357 1,409 4,106 635 2,185 878 Reversal of provision for loan-loss [3] - - Gain on recovery of written-off claims 2 8 2 5 2 2 64 4 1 [4] Ordinary profit 5,693 2,646 4,046 -408 6,943 1,336 6,002 -2,998 13,115 YoY 16.1% -23.9% 23.4% - 22.0% -49.5% 48.3% - 88.9% Extraordinary income (losses) -89 -106 -364 -595 -58 -579 -27 -233 -54 Profit before income taxes 5,603 2,540 3,682 -1,002 6,885 757 5,975 -3,232 13,061 Income taxes 2,067 1,058 1,458 -436 2,202 795 1,927 -492 3,943 Profit 3,537 1,481 2,224 -566 4,682 -37 4,048 -2,739 9,116 YoY 6.7% -34.3% 8.2% - 32.4% - 82.0% - 94.7% Credit cost ([1]+[2]-[3]-[4]) 3,196 1,671 2,431 2,461 1,720 5,444 752 3,406 1,379 YoY 186.9% - 188.0% 86.7% -46.2% 225.8% -69.1% 38.4% -19.8% Securities-related gains (incl. stock and 4,697 2,103 3,065 62 4,203 5,175 3,763 -2,128 10,276 bonds) YoY 309.9% 148.0% 425.7% -40.4% -10.5% 146.1% 22.8% - 144.5%

Source: Shared Research based on bank data Note: Figures may differ from bank materials due to differences in rounding methods. Q1 FY03/22 results Summary

Ordinary income (consolidated): JPY26.7bn (+21.1% YoY) Core gross profit (non-consolidated): JPY11.2bn (+2.5% YoY) Core operating profit (non-consolidated): JPY3.8bn (+4.3% YoY) Ordinary profit (consolidated): JPY13.4bn (+83.5% YoY) (106.7% of the revised full-year target) Profit (consolidated): JPY9.2bn (+91.5% YoY) (167.7% of the revised full-year target)

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 10 Key points (non-consolidated results)

Core operating profit: (core gross profit - net bond-related gains/losses - general and administrative expenses) increased JPY157mn to JPY3.8bn (+4.3% YoY) due to increases of JPY873mn in core gross profit, JPY602mn in net gains/losses on bonds, and JPY114mn in general and administrative expenses.

Ordinary profit rose JPY6.2bn YoY to JPY13.1bn (+88.9% YoY). Core operating profit was up JPY569mn and non-recurring gains and losses (mainly net stock-related gains/losses) was up JPY5.6n (+198.3% YoY).

Gains on securities (net stock-related gains and net bond-related gains) increased JPY6.1bn YoY to JPY10.3bn (+144.5% YoY), and the cost of credit declined JPY341mn to JPY1.4bn (-19.8% YoY). As a result, the cost credit rate on loans outstanding was 5bp, down 2bp YoY.

The non-consolidated equity ratio rose 0.49pp YoY to 13.22%.

Non-consolidated profit/losses

Core gross profit

Core gross profit rose JPY271mn YoY to JPY11.2bn (+2.5% YoY). Net interest income was the growth driver, increasing JPY249mn YoY (+2.7% YoY). The rise in net interest income is mainly due to increased dividends on securities. Net fees and commissions were down JPY34mn (-2.4% YoY). Net other operating income was up JPY659mn YoY, of which net bond-related gains/losses was up JPY602mn. The decline in net fees and commissions was mainly due to the weak performance of consulting services.

General and administrative expenses

General and administrative expenses increased JPY114mn YoY to JPY7.4bn. Non-personnel expenses increased JPY78mn YoY and taxes by JPY37mn, but personnel expenses were down JPY1mn YoY. OHR was 66.2%, down 0.6pp from 66.8% in FY03/21.

Non-recurring gains/losses

Non-recurring gains increased JPY5.6bn YoY to JPY8.4bn (+198.3% YoY), primarily owing to a YoY increase of JPY5.5bn (+160.9% YoY) in net stock-related gains.

Cost of credit

Cost of credit fell JPY341bn YoY to JPY1.4bn. The provision of allowance for general loan losses increased JPY191mn, but the NPL disposal amount was down JPY531mn to JPY878mn. Full-year bank forecast Numerical targets

For FY03/22, the bank forecasts consolidated ordinary profit of JPY12.5bn (-3.0% YoY) and profit of JPY5.5bn (-18.5% YoY). On a non-consolidated basis, it forecasts ordinary profit of JPY11.5bn (+1.9% YoY), profit of JPY5.0bn (-16.0% YoY), and core operating profit of JPY12.0bn. The forecast assumes that the impact of COVID-19 on the overall economy will continue to some extent. The bank expects a sharp decline in profit in line with a variety of structural reform costs, including costs incurred as a result of the planned October 2021 shift to a holding company structure.

Earnings forecast

FY03/20 FY03/21 FY03/22 YoY (JPYmn) 1H Act. 2H Act. FY Act. 1H Act. 2H Act. FY Act. 1H Est. 2H Est. FY Est. FY Est. Consolidated ordinary income 39,483 35,257 74,740 42,451 36,647 79,098 Consolidated ordinary profit 8,746 4,435 13,181 9,049 3,841 12,890 9,000 3,500 12,500 -3.0% Consolidated profit 5,229 2,081 7,310 5,054 1,698 6,752 5,000 500 5,500 -18.5% Core gross profit (non-cons.) 20,704 20,880 41,584 20,255 20,699 40,954 Core operating profit (non-cons.) 6,317 5,845 12,162 5,722 6,056 11,778 Ordinary profit (non-con.) 8,339 3,638 11,977 8,279 3,004 11,283 8,500 3,000 11,500 1.9% Profit (non-cons.) 5,018 1,658 6,676 4,645 1,309 5,954 4,800 200 5,000 -16.0%

Source: Shared Research based on bank data

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 11 Non-consolidated earnings forecast

President and CEO Shuji Tsuemura has indicated the bank aims to accelerate its medium-term business plan through FY03/24 by one or two years. Therefore, its earnings are unlikely to expand in the near term as the bank expects performance in FY03/21–22 to be weighed down by growth in expenses associated with upfront investment and by an increase in cost of credit due to the impact of the COVID-19 pandemic.

Assumptions of the forecast

Net interest income: The bank basically looks for a 5bp decline in the yield on loans over the full year, but its yield on non-corporate loans (consumer loans) is showing signs of bottoming out due in part to the effects of a 0.1pp hike in the bank’s prime interest rate in autumn 2019. The bank has been reviewing its lending practices and focusing less on quantity and more on quality. The bank’s operating stance is focused on customer relations, with a view towards pointing those customers toward its Consulting services business.

Net fees and commissions: The bank anticipates an increase of 8% YoY, but it was unable to conduct sufficient sales activities in April­–May in Q1 FY03/21, so we will carefully watch whether it can compensate for the lag in Q2 and beyond. The bank indicated that activities in its Consultation services and Bank cards businesses were getting back to normal from August 2020.

General and administrative expenses: The bank expects an increase driven by non-personnel expenses. It forecasts an increase in systems-related costs in line with digital transformation (DX) initiatives and efforts to strengthen the development of in-house systems. Medium- to long-term business strategy Numerical targets

On April 28, 2021, the bank announced its medium- to long-term strategy. The bank announced as its current medium-term business plan “Communication x Collaboration x Innovation 2024” in November 2019. However, it has changed to a format of visualizing five- and ten-year targets and updating annually its strategies and implementation policies to attain them.

The bank formulated the medium- to long-term business strategy based on the need to have an awareness of its medium- to long-term direction. In addition, the bank will take into account rapidly changing social and environmental conditions to implement and regularly update the strategy for increased flexibility and to ensure that it is in line with actual conditions.

Medium-term target levels:

Profit and other numerical targets for five and ten years ahead are as follows.

FY03/21 FY03/26 FY03/31 CAGR (FY03/21– CAGR (FY03/21– CAGR (FY03/26– (JPYmn) Act. Five years ahead Ten years ahead FY03/26) FY03/31) FY03/31) Recurring profit (cons.) 12,800 16,000 21,000 4.6% 5.1% 5.6% Net interest income 34,600 33,500 33,000 -0.6% -0.5% -0.3% Net fees and commissions 8,100 12,000 15,500 8.2% 6.7% 5.3% Bank cards 1,500 3,400 4,000 17.8% 10.3% 3.3% Leasing 1,800 1,900 2,500 1.1% 3.3% 5.6% Consultation 600 2,000 4,000 27.2% 20.9% 14.9% Other new businesses 0 200 500 - - 20.1% Personnel expenses 14,500 13,500 13,000 -1.4% -1.1% -0.8% Non-personnel expenses 13,400 14,000 13,000 0.9% -0.3% -1.5% Core system costs 5,800 6,300 4,800 1.7% -1.9% -5.3% Profit (cons.) 6,700 10,000 13,000 8.3% 6.9% 5.4% Income from new businesses 3,900 7,500 11,000 14.0% 10.9% 8.0% (cons.) Overhead ratio (core gross 70.7% 65.0% 55–60% profit-based ROE (cons.) 2.5% 3.5% 4.5%

Net interest income includes investment income from an investment company that the bank plans to establish. Income from new businesses (consolidated) is income from new businesses including bank card, leasing, and consulting. Other new businesses include business income from a planned investment advisory company, e-commerce mall, etc. Source: Shared Research based on bank data

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 12 Strategy outline:

Expand business bases: augment business bases/areas through new businesses and expand customer base through strengthening of existing businesses

Make credit risk management and support system more sophisticated: management improvement support by understanding business feasibility and strengthening consulting functions

Maximize group synergies: improve the quality of services provided to the local communities by speeding up decision making and ensuring the efficient operation of business

Train people able to contribute toward improving regional quality: increase mobility of group personnel and train next- generation management team

Progress in meeting medium-term plan targets

In November 2019, Hokkoku Bank extended its original three-year medium-term business plan covering through FY03/21, until FY03/24 (now effectively a six-year plan), rebranding it as “Communication x Collaboration x Innovation 2024” (the current medium-term business plan).

The medium-term business plan calls for FY03/24 consolidated ordinary profit of JPY16.0bn and profit of JPY10.0bn. It targets JPY4.0bn in non-consolidated income from new businesses, which include Bank cards, Leasing, and Consultation services. As for management indicators, it looks to maintain a capital adequacy ratio in the 11% range, and targets OHR of 60-65% and ROE in the 4.0% range. Over the long term, it aims to bring down non-consolidated OHR to the 50% range and raise non-consolidated ROE to over 5.0%.

The FY03/21 briefing materials show a slight adjustment in the current medium-term business plan, with the non-consolidated profit target lowered from JPY9.5bn to JPY8.0bn. The bank expects net interest income below target of JPY35.0bn on an increase in low-interest loans, including COVID-19 countermeasure loans. Moreover, it expects non-personnel costs of JPY14.5bn, exceeding the target of JPY12.5bn, as it expects DX initiatives and the strengthening of in-house systems development to increase systems-related costs from JPY5.7bn in the plan to JPY7.5bn.

Numerical targets in medium-term business plan

FY FY03/19 FY03/20 FY03/21 FY03/22 FY03/23 FY03/24 FY03/25 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Previous medium-term plan (JPYmn) Communication x Collaboration x Innovation 2024: Current medium-term plan (three year extension of the previous plan) Rev. Act. Act. Est. Act. Est. Est. Est. Est. Plan Ordinary profit (consolidated) 14,165 13,181 12,500 12,890 16,000 Profit (consolidated) 8,583 7,310 8,000 6,752 10,000 Profit (non-consolidated) 9,500 8,000 Net interest income (non-consolidated) 35,556 34,876 35,000 34,259 35,000 34,000 Net fees and commissions (non-consolidated) 5,603 5,937 6,500 5,736 9,000 Income from new businesses (non-consolidated) 1,224 1,756 2,500 1,912 4,000 Consultation 410 661 1,200 611 1,500 Individuals 200 - Corporates 1,000 - Leasing 274 332 600 360 500 Bank cards 537 762 700 941 2,000 General and administrative expenses (non- 28,256 29,422 25,000–25,500 29,175 consolidated Non-personnel expenses 12,004 13,062 12,975 12,500 14,500 Core system costs 5,700 7,500 Personnel expenses 14,372 14,261 13,958 Core system costs (depreciation, upgrades, operation, 2,600 2,700 3,100 3,100 3,000 2,300 1,600 and maintenance) Maintain 11.0– Capital adequacy ratio (consolidated) 11.78% 10.30% 12.5–13.0% 13.04% 12.0% Overhead ratio (non-consolidated; core gross profit- 68.1% 70.75% 71.24% 60–65% based) ROE (non-consolidated) 3.12% 2.75% 2.40% 4.0% Number of employees 1,787 1,759 1,764 1,800 Number of branches applying the branch-in-branch 5 8 11 10–15 approach

Source: Shared Research based on bank data Note: FY03/21 targets are the initial targets included in the previous medium-term plan.

Assumptions behind the medium-term business plan

The medium-term business plan does not include a numerical target for core gross profit. Assuming the BOJ will maintain its negative interest rate policy for the foreseeable future, net interest income is likely to remain in a downtrend. The medium-

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 13 term plan envisages noninterest income businesses will offset the decline in net interest income, while reducing expenses such as depreciation of systems by migrating the core banking system to the cloud.

Accounting for more than half of core gross profit, net interest income CAGR over the past five years has stood at -3.5%. Net interest income tends to follow trends in outstanding of loans and yields on loans. Even if the outstanding of loans CAGR matches that of the past five years (2.4%), a decline in net interest income appears all but inevitable given lower yields on loans.

Key points of medium-term business plan

Strengthen net noninterest income

The medium-term plan calls for non-consolidated income of JPY4.0bn from new businesses, breaking down into JPY2.0bn for the Bank cards business, JPY1.5bn for the Consultation services business, and JPY500mn for the Leasing business. The bank is particularly focusing on income growth in the Bank cards business, which expanded from JPY762mn in FY03/20 to JPY2.0bn. Bank card business income reached to just JPY941mn in FY03/21 due to the impact of the COVID-19 pandemic. The Bank cards business has already been profitable on a single-year basis, and the bank expects the promotion of cashless payment solutions to contribute to increases in affiliated merchants and in the number of debit cards issued.

Hokkoku Bank aims to expand its Leasing business share by achieving an optimal mix of lending and leasing services. However, it has lowered its numerical target from JPY600mn in the previous medium-term plan to JPY500mn in recognition of fierce price competition from major leasing companies. To shore up its group-wide sales capabilities, in April 2020 Hokkoku Bank established a new leasing division to oversee leasing business across the group. The bank has consolidated its credit decisions and response policies, and set up an operating structure that covers all aspects from lease consultations to execution. Shared Research understands that the bank will emphasize cooperation with Hokkoku General Leasing as the bank shifts to a holding company structure.

Key points of medium-term management strategy

Source: Shared Research based on bank data

In the Consultation services business, the bank aims to cultivate professional personnel who can handle a large number of complex challenges and provide new value from a top management perspective. By expanding target customers beyond

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 14 individual companies and providing comprehensive consultation services for corporate groups and industries as a whole, the bank will develop programs that contribute to the development of regional ecosystems.

Enhance efficiency through IT-driven sales and cost reductions

Hokkoku Bank’s IT system strategy is a critical part of its overall management strategy. Its Hokkoku Cloud Banking system, released in 2019, has mainly supported individual customer transactions but will have support for corporate customer transactions in 2021. This will provide cloud banking support for nearly all of the transactions handled by Hokkoku Bank’s physical branches today. Because the system runs on a public cloud service, the bank will be able to rapidly respond to customer needs while keeping costs down. The bank in May 2021 launched the operation of its cloud-based core banking system. It expects to leverage the resulting data to qualitatively enhance its sales activities from 2022. The bank is also striving to bring the development of subsystems in-house. The in-house development of subsystems is expected to reduce maintenance costs and system upgrade investment.

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 15 Business Bank overview Prominent regional bank in Hokuriku area

Hokkoku Bank is a mid-tier regional bank operating out of Ishikawa Prefecture. It was formed out of a merger of Kano Godo Bank, Kashu Bank, and Nowa Bank in December 1943. It became the only regional bank headquartered in Ishikawa Prefecture when former rival Ishikawa Bank filed for bankruptcy in 2001. The bank has no ties with megabanks or conglomerate-controlled banks, and therefore has a strong independent character.

It had total assets of JPY5.3tn as of end-September 2020 (putting it in 31st position among the 64 regional banks nationwide; non-consolidated basis) and had the highest lending share (at 42.5%) in Ishikawa Prefecture in FY03/20 (according to the “Financial Map for 2021” special issue of the monthly magazine “Financial Journal”). Hokkoku Bank has a traditional banking business model centered on deposit and lending transactions. It raises short-term funds through deposits and invests in long- term assets such as loans and securities, earning the yield spread between short and long-term interest rates.

In addition, the bank collects fees from noninterest income transactions (currency transactions such as the transfer of funds between distant areas, and noninterest income businesses including consulting, cards, and leasing operations). In recent years, the bank has focused on Consultation services, Bank cards, and Leasing as new businesses, and its fee-based businesses are expanding steadily.

Mainly operates in “three Hokuriku prefectures”

Hokkoku Bank is headquartered in Ishikawa Prefecture, but it has expanded its presence into neighboring Toyama and Fukui Prefectures. Collectively referred to as the “three Hokuriku prefectures,” these three prefectures form an industrialized zone along the Sea of Japan nearly equidistant from Japan’s three largest metropolitan areas—the Tokyo, Tokai, and Kinki metropolitan areas. By shipment value, the top industries in the region are chemicals (Toyama ranked top among 47 prefectures, Ishikawa 6th, and Fukui 2nd), industrial machinery and equipment (Toyama 4th, Ishikawa 1st, and Fukui 8th), and electronic components, devices, and electric circuits (Toyama 5th, Ishikawa 2nd, and Fukui 1st) (based on the 2014 Census of Manufacture by Ministry of Economy, Trade and Industry [METI]).

Other characteristics common in the three prefectures are high education standards, a high ratio of women in the workforce, and a low employee turnover rate. Access to female labor has contributed to the development of the textile, electronic component, and other industries that require meticulous workmanship. Between 2015 and 2040, the population in these three prefectures is expected to fall 7.1% in Toyama Prefecture, 5.4% in Ishikawa Prefecture, and 5.6% in Fukui Prefecture, exceeding the average national decline of 4.8%. However, the area is expected to attract a growing number of domestic and international tourists once the Hokuriku Shinkansen route—which opened in 2015 and currently runs from Tokyo to Kanazawa (Ishikawa Prefecture)—is extended to Tsuruga (Fukui Prefecture) at the end of FY2023 (The Ministry of Land, Infrastructure, Transport and Tourism on March 31, 2021 revised the expected completion date for the project from end-FY2022 to end- FY2023).

Enhanced cost structure and fee business through overhaul of business model

In FY03/21, non-consolidated core operating profit declined YoY due to a rise in cost of credit. However, the bank continues to make steady progress with the transformation of its business model through operational reforms that started in 2000. Its reforms aimed at achieving a low-cost structure began with a shift to paperless operations, and the resulting productivity gains have allowed employees to reduce overtime work and increase time spent interacting with customers. Putting work rationalization via IT systems at the heart of its reforms, the bank has realized a backbone system (core banking system mainly centered on account management) based on open standards and brought systems development and maintenance in-house under a self-reliance policy. It is also working to move its core banking system to the cloud (an industry first), and started operating the cloud-based system in May 2021. It has also leveraged its expertise (accumulated in its own operational restructuring) in paid consultation services aimed at resolving customer problems, and this has contributed to its earnings.

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 16 Planned transition to a holding company structure in October 2021

The bank plans to establish a holding company, the Hokkoku Financial Holdings Co., Ltd. through a simple transfer of shares, effective October 1, 2021. After the establishment of the holding company, all subsidiaries and subsidiary corporations (excluding two non-consolidated subsidiaries) will be reorganized as companies directly held by the holding company, using methods such as paying distribution-in-kind to the holding company for all shares held by Hokkoku Bank.

With the goal of accelerating the realization of the “next generation of integrated regional companies,” the bank will consolidate group management functions in the holding company and improve management efficiency in the group as a whole by allowing the subsidiaries, starting with the bank, to specialize in the promotion of their businesses. The bank also aims to expand the range of businesses in which it operates as well as its business lines. For existing subsidiary Digital Value, the focus is on expanding the customer base to other financial institutions and general businesses. For servicer Hokkoku Servicer, the focus is on strengthening the purchasing of receivables from other financial institutions that do not have a servicer function.

Subject to the approval of the financial authorities, the bank also plans to expand its business lines through the establishment of new companies. Disclosed subsidiaries under this plan include: 1) CC Innovation, derived from the Hokkoku Bank consulting department and expected to launch in June 2021; 2) QR Investment, which is expected to be launched in June 2021 and will provide capital support to a wide range of business partners, including business revitalization companies, business succession companies, and regional revitalization companies; and 3) FD Advisory, which was launched in May 2021 and develops the investment advisory business for individuals and corporations.

Scheme for transitioning to a holding company structure

Source: Shared Research based on bank data

In the wake of the restructuring, the bank will be expected to serve as a front-line sales force for the group. The holding company will handle not only planning, auditing, and management administration, but also systems and sales planning. According to the bank, all bank employees will be expected to resign and then be transferred to the holding company subsidiaries as personnel belonging to the holding company.

In terms of the subsidiary names, the CC in CC Innovation stands for Communication & Collaboration, the QR in QR Investment stands for Quality Region, and The FD in FD Advisory stands for Fiduciary Duty.

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 17 Business description Business model Customers

Hokkoku Bank’s customers are mainly individuals and companies in Ishikawa, Toyama, and Fukui Prefectures. The three Hokuriku prefectures have a total population of approximately 2.98mn (Ishikawa 1.14mn, Toyama 1.06mn, and Fukui 780,000). Based on monthly average disposable income, Ishikawa Prefecture currently ranks top among the 47 prefectures of Japan, Toyama Prefecture 3rd, and Fukui Prefecture 5th, suggesting these are relatively affluent areas. The three prefectures also have high homeownership rates.

Overview of three Hokuriku prefectures

Nationwide Hokuriku % of Japan Toyama Ishikawa Fukui Total area sq. km 377,974 12,624 3.34% 4,248 4,186 4,191 Total population 000 127,138 2,976 2.34% 1,056 1,140 780 Gross product by industry (nominal; FY2016) JPYbn 549,866 12,400 2.26% 4,566 4,623 3,211 Primary JPYbn 6,107 127 2.08% 50 43 32 Secondary JPYbn 149,290 4,255 2.85% 1,748 1,489 1,052 Tertiary JPYbn 392,227 7,993 2.04% 2,754 3,209 2,119 Number of listed companies 3,843 71 1.85% 27 28 16 Number of offices 5,340,783 153,199 2.87% 51,785 59,770 41,644 Number of employees 000 56,873 1,423 2.50% 505 541 377

Source: Shared Research based on “Population, Demographics, and Number of Households Based on Basic Resident Register” by the Ministry of Internal Affairs and Communications (MIC), “Prefectural Accounts” by the Cabinet Office, the “2016 Economic Census – Activities Survey” by MIC, and other materials

Income levels by region

Nationwide Hokuriku Toyama Ishikawa Fukui Real income per working household (monthly) JPY'000 534 610 591 (9) 651 (1) 587 (10) Disposable income (monthly) JPY'000 434 510 510 (3) 517 (1) 504 (5) Income per head JPY'000 3,217 3,110 3,295 3,023 3,157 Passenger cars per head units 1.052 1.681 (2) 1.488 1.736 (1) Homeownership ratio ％ 79.4 (1) 70.8 76.5 (4) Total floor space per home sqm 150.08 (1) 127.58 (7) 143.83 (2)

Source: Family Income and Expenditure Survey by MIC Note: Prefecture rankings in parentheses

The three Hokuriku prefectures form an industrial zone along the Sea of Japan nearly equidistant from Japan’s three largest metropolitan areas—the Tokyo, Tokai, and Kinki metropolitan areas. By shipment value, the top industries in the area are chemicals (Toyama ranked top among 47 prefectures, Ishikawa 6th, and Fukui 2nd), industrial machinery and equipment (Toyama 4th, Ishikawa 1st, and Fukui 8th), and electronic components, devices, and electric circuits (Toyama 5th, Ishikawa 2nd, and Fukui 1st) (based on the 2014 Census of Manufacture by METI).

Major industries in the three Hokuriku prefectures and domestic market shares

% of Japan Industry Products Shipments from three Hokuriku prefectures Hokuriku Toyama Ishikawa Fukui Silk, rayon textile refining, bleaching and dyeing 76.4% 0.0% 0.0% 76.4% 782 Polyester long fiber textiles 72.4% 0.0% 36.8% 35.6% 24,121 Textile industry Warp knit fabrics 75.5% 32.0% 2.8% 40.6% 19,622 Fabric tapes 52.2% 1.0% 20.3% 30.9% 18,360 Knit and lace dyeing and finishing 66.9% 0.0% 0.0% 66.9% 5,581 Manufacture of furniture and fixtures Fixtures for offices and stores 35.8% 3.3% 32.5% 0.0% 69,171 Manufacture of pulp, paper, and paper products Japanese traditional paper 25.2% 6.5% 0.0% 18.6% 546 Copper recycled metals, copper alloy 52.7% 52.7% 0.0% 0.0% 27,943 Manufacture of non-ferrous metals and products Aluminum extrusion 26.6% 26.6% 0.0% 0.0% 87,097 Copper alloy castings 28.9% 23.2% 5.7% 0.0% 28,909 Aluminum sash for residential use 41.5% 39.6% 1.0% 0.8% 117,235 Manufacture of fabricated metal products Rivets 30.9% 0.0% 15.4% 15.5% 10,791 Metallic foil 84.3% 0.0% 84.3% 0.0% 4,130 Parts for manufacturing and knitting machineries 42.3% 1.8% 37.1% 3.4% 13,149 Manufacture of production machinery Dedicated machines 27.0% 26.5% 0.5% 0.0% 52,654 Silicon transistors 29.6% 0.0% 29.6% 0.0% 52,654 Electronic parts, devices, and electronic circuits Resistors 25.3% 6.2% 0.0% 19.1% 40,177 Glass frames 96.7% 0.0% 0.0% 96.7% 32,971 Other Parts for glasses 94.9% 0.0% 0.0% 94.9% 5,916 Lacquerware kitchen and dining products 73.8% 1.3% 33.8% 38.8% 7,732

Source: Shared Research based on METI’s 2014 Economic Census

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 18 There are more than100,000 companies in the three Hokuriku prefectures and Toyama and Ishikawa Prefectures have many large companies. A total of 71 listed companies operate in the region (28 in Ishikawa Prefecture, 27 in Toyama Prefecture, and 16 in Fukui Prefecture). The top five companies by market capitalization (as of end-May 2021) in each prefecture were: (1) Toyama Prefecture: Hokuriku Electric Power Company, Hokuhoku Financial Group, Inc., Nichi-Iko Pharmaceutical Co., Ltd., Tonami Holdings Co., Ltd., and Daito Pharmaceutical Co., Ltd.; (2) Ishikawa Prefecture: Kusuri No Aoki Holdings Co., Ltd., EIZO Corporation, Shibuya Corporation, Hokkoku Bank, and Komatsu Matere Co., Ltd.; and (3) Fukui Prefecture: Mitani Corporation, Seiren Co., Ltd., Maeda Kosen Co., Ltd., Mitani Sekisan Co., Ltd., and Fukui Bank, Ltd.

Number of companies by business scale in three Hokuriku Prefectures

(number of companies) Large corporations % of total Small and medium enterprises % of total Medium % of total Small % of total Total % of total Nationwide 11,157 0.3% 3,578,176 99.7% 529,786 14.8% 3,048,390 84.9% 3,589,333 100.0% Hokuriku 227 0.2% 104,253 99.8% 14,237 13.6% 90,016 86.2% 104,480 100.0% Toyama 93 0.3% 34,613 99.7% 5,042 14.5% 29,571 85.2% 34,706 100.0% Ishikawa 89 0.2% 40,430 99.8% 5,398 13.3% 35,032 86.5% 40,519 100.0% Fukui 45 0.2% 29,210 99.8% 3,797 13.0% 25,413 86.9% 29,255 100.0%

Source: Shared Research based on bank data Note: Data as of end-June 2016.

Main banks in three Hokuriku prefectures

Of the 47,265 companies headquartered in the three Hokuriku prefectures, 27.33% have selected Hokuriku Bank (Toyama Prefecture) as their main bank (-0.06pp YoY), 19.78% Hokkoku Bank (Ishikawa Prefecture, +0.42pp YoY), and 15.77% Fukui Bank (Fukui Prefecture, -0.16pp YoY) (Tokyo Shoko Research, as of end-March 2020).

Value chain

Hokkoku Bank has a traditional banking model under which net interest income from deposit and loan transactions accounts for 88.5% of non-consolidated core gross profit, so its value chain consists of (1) accepting deposits from depositors, (2) centrally managing accumulated deposits and pooling funds that can be readily redirected toward loans, (3) making loans with funds raised through deposits, (4) creating liquidity through fund transfers (such as account transfers), (5) screening repayment ability of borrowers, (6) shouldering and managing credit risk, and (7) recovering loans. In this way, the bank functions as a platform that joins together different customers segments such as depositors and borrowers in its deposit and lending operations, remitters and recipients in its fund transfer operations, and payers and providers of public services in its automatic withdrawal operations.

Value provision

Through its value chain, the bank provides fundamental value to customers across a range of services that include (1) deposits as a principal-protected method to manage funds, (2) corporate loans based on an understanding of customer businesses, (3) bank transfers, bills and checks, automatic withdrawals, and other settlement services, and 4) cash-related services offered free of charge (such as deposit and cash withdrawal).

However, the financial intermediary function of the banking business has weakened since households and companies have entered a state of a cash surplus. This is apparent in Hokkoku Bank’s loan-to-deposit ratio, which has declined from 74.6% in FY03/11 to 65.0% in FY03/21. Also, trends such as the progressive unbundling of financial functions and fierce competition from a growing number of newcomers from other industries are eroding the value of the traditional banking business value chain, centering on deposits and lending.

Loan-to-deposit ratio: The loan-to-deposit ratio represents loans outstanding as a proportion of bank deposits. It is calculated as “loans outstanding /(deposits + negotiable certificates of deposit) x 100.” It is an indicator of the degree to which a bank allots deposits to loans. When companies obtain loans for capital expenditures and thus strengthen their competitiveness, they energize the economy and contribute to the exit from deflation. Under such circumstances, the loan-to-deposit ratio increases. Conversely, a low loan-to-deposit ratio indicates low demand for funds among private-sector companies. Another factor that puts downward pressure on the loan-to-deposit ratio is banks’ reluctance to lend to SMEs due to NPL concerns. When the loan-to-deposit ratio is low, banks invest surplus funds in securities and other financial instruments.

To counter these trends, Hokkoku Bank has been expanding its fee income (noninterest income) businesses, and has shifted its business model to provide new value to customers, including through consultation services. It has gained extensive

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 19 experience through its business reforms since 2000, which have included improvements in productivity through concentration of office work, a transition to paperless operations and effective ICT strategies, and a reform of its personnel evaluation system and organization. It strives to pass on such experience and expertise to customers through consultation services, and customers have appreciated the proposal capabilities of the bank’s relationship managers (RMs) handling corporate transactions, relative to those at its competitors.

Sales channels

Branches

Hokkoku Bank’s largest sales channel through which it offers value to customers is its network of 105 offices. As of end-March 2021, the bank had 87 locations in Ishikawa Prefecture, 11 locations in Toyama Prefecture, three in Fukui Prefecture, one location each in Tokyo, Osaka, Nagoya, and Singapore, and one overseas office each in Shanghai, Bangkok, and Ho Chi Minh City. The 105 branches include 11 branch-in branches, with location count at 94. This network of branches was reduced significantly throughout the business model reforms started in 2000, when the bank transitioned from a comprehensive banking system that enabled transactions for individual and corporate customers across all branches, to an area-specific sales structure. Under the new structure, the bank set up a few main branches (that handle transactions for both individual and corporate customers), and multiple satellite branches (that mainly cater to individual customers) around each main branch. In 2016, Hokkoku Bank became the first Japanese regional bank to establish a branch in Southeast Asia.

In the past, when the bank mainly competed for lending volume with rivals, it made sense to operate a large network of branches to increase contact with customers. However, as the population in the region continues to decline and demand for funds shrinks, aggressive sales tactics have largely become obsolete. In a bold move, Hokkoku Bank scaled back its branch network from 155 branches in 1997 to 97 (excluding eight branch-in-branches) as of end-March 2020. If we index its number of branches in FY03/01 at 100, its number of branches contracted to 73.4. This compares with average 96.2 for the 64 regional banks.

Sales structure and Hokkoku Cloud Banking

While downsizing its branch network, Hokkoku Bank has worked to diversify contact points with customers in line with their needs.

While the previous organizational structure involved instructions being handed down from headquarters to the branches, centering on the branch manager, from FY03/22 the bank has been revising its organizational structure to assume a flatter organizational form, with an aim to promote collaboration between the headquarters and the branches. By dividing the headquarters and branches into corporate and individual departments, the bank aims to bolster collaboration with the headquarters, improve the skills of employees in both areas, and accelerate the implementation of corporate strategies.

In the area of sales to individuals, the Personal Department takes the lead, with financial advisors (FAs) conducting sales counter activities at the branches and conducting home visits. The Corporate Department handles corporate transactions, with relationship managers (RMs) conducting sales visits to corporate and individual customers.

In terms of non-face-to-face sales channels, the bank revamped its online banking for individual customers and launched Hokkoku Cloud Banking in September 2019, making it the first Japanese regional bank to migrate its online banking services to the cloud. With the release of Hokkoku Cloud Banking, the bank fully revamped the user interface (UI) of its online banking services and introduced a smartphone app, biometric authentication, transaction approval system with smartphone app, a one-time password, and round-the-clock real-time funds transfer system. It also waived fees for money transfers to Hokkoku Bank accounts. As of FY03/21, the bank had roughly 1.2mn deposit accounts, about 160,000 of which have been registered for Hokkoku Cloud Banking.

Earnings structures

Income structure

Core gross profit = net interest income + net noninterest income

The income of the Banking business breaks down into interest income from loan and deposit transactions, and noninterest income derived from fee businesses. Main earnings in the business are expressed as core gross profit, which corresponds to gross profit at regular companies. Net interest income is the difference between interest income (mainly interest on loans and discounts and interest and dividends on securities) and interest expenses (mainly interest on deposits). On the other hand,

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 20 net noninterest income corresponds to net fees and commissions (fee income earned from the provision of financial services minus direct expenses incurred to provide such services) and the difference between total gains/losses in trading accounts and net gains/losses on bonds such as government bonds, municipal bonds, and corporate bonds (gains/losses on sales, gains/losses on redemption, and losses on devaluation of bonds). In other words, net noninterest income is equivalent to “net fees and commissions + net trading income + net other operating income - net gains/losses on bonds.” Since the bank does not possess trading accounts, it does not record net trading income.

Net interest income

Over 70% of the bank’s net interest income is generated from interest on loans and discounts (= loans outstanding x deposit- lending margins). Deposit-lending margin is the sum of deposit margin (deposit spread; market interest rates minus yield on deposit) and lending margin (lending spread; yield on loans minus market interest rates). The market interest rates used in the calculations of the deposit and lending spreads are the three-month TIBOR and 10-year swap rates, respectively.

Deposit-lending margin is based on deposit and lending spreads. However, deposit spread has effectively evaporated amid the continued negative interest rate policy by the BOJ. This means lending spread has essentially accounted for all of deposit- lending margins since FY03/19. Hokkoku Bank’s yield on loans has declined from 1.72% in FY03/11 to 0.95% in FY03/21. It remains above the bank’s expense ratio, but the gap between the two is shrinking. Gross deposit-lending margin (including yield on securities) fell by about three quarters from 0.30% in FY03/11 to 0.07% in FY03/21.

Yields and margins

Yield and margins FY12/03 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 (non-consolidated) Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. (all branches) Yield on investment (A) 1.46% 1.36% 1.27% 1.22% 1.10% 1.05% 1.03% 0.88% 0.80% 0.73% Yield of loans 1.61% 1.47% 1.36% 1.28% 1.27% 1.23% 1.13% 1.06% 1.02% 0.95% Yield on securities 1.22% 1.17% 1.13% 1.15% 1.21% 1.19% 1.52% 1.31% 1.09% 0.93% Cost of funding (B) 1.11% 1.04% 0.99% 0.91% 0.80% 0.81% 0.76% 0.72% 0.68% 0.61% Deposit yield 0.09% 0.06% 0.03% 0.02% 0.02% 0.01% 0.01% 0.01% 0.00% 0.00% Expense ratio 1.00% 0.97% 0.95% 0.95% 0.90% 0.89% 0.84% 0.81% 0.81% 0.74% Gross deposit-lending margin (A)-(B) 0.34% 0.31% 0.28% 0.31% 0.30% 0.24% 0.27% 0.16% 0.12% 0.12% (Japan) Yield on investment (A) 1.45% 1.35% 1.27% 1.21% 1.05% 0.99% 0.96% 0.80% 0.74% 0.68% Yield of loans 1.61% 1.47% 1.36% 1.28% 1.28% 1.22% 1.12% 1.03% 0.99% 0.95% Yield on securities 1.19% 1.12% 1.10% 1.08% 1.08% 1.06% 1.40% 1.11% 0.99% 0.83% Cost of funding (B) 1.11% 1.04% 0.99% 0.93% 0.80% 0.81% 0.71% 0.63% 0.63% 0.61% Deposit yield 0.09% 0.06% 0.03% 0.02% 0.02% 0.01% 0.01% 0.00% 0.00% 0.00% Expense ratio 1.00% 0.97% 0.95% 0.95% 0.89% 0.88% 0.82% 0.79% 0.79% 0.73% Deposit-lending margin 1.52% 1.41% 1.33% 1.26% 1.26% 1.21% 1.11% 1.03% 0.99% 0.95% Net deposit-lending margin 0.52% 0.44% 0.38% 0.31% 0.37% 0.33% 0.29% 0.24% 0.20% 0.22% Gross deposit-lending margin (A)-(B) 0.34% 0.31% 0.28% 0.28% 0.25% 0.18% 0.25% 0.17% 0.11% 0.07%

Source: Shared Research based on materials published by Hokkoku Bank, the Regional Banks Association of Japan, Hokuriku Bank, and Fukui Bank

Interest and dividends on securities are the second major source of income, after interest on loans and discounts. They comprise interest and dividends on trading account securities and securities, and cash dividends on investment trusts (including gains on cancellations and redemptions). The high ratio of interest and dividends on securities to the bank’s core gross profit indicates the bank’s dependence on investment in securities. The average ratio in 10 years through FY03/20 was 25.4% (25.6% through FY03/21), surpassing the average of 23.6% for the 64 regional banks. Hokkoku Bank’s dependence on interest and dividends on securities has increased consistently from FY03/14, rising to 33.2% in FY03/18. In FY03/20 and FY03/21, the bank used such interest and dividends to aggressively implement charge-off and provisioning in preparation for an increase in NPLs. Its securities-to-deposit ratio has averaged 30.5% over the last 10 years and stood at 29.5% in FY03/21.

Securities-to-deposit ratio: The securities-to-deposit ratio represents the balance of securities under management as a proportion of balance of deposits (including NCDs). A high securities-to-deposit ratio means a bank is actively investing in securities. However, securities holdings may be subject to impairment losses during market shocks. Investments in safer financial instruments such as government bonds entail low costs to gather credit risk information therefore yield lower returns than loans, which require a greater degree of credit risk information. Consequently, banks with a high securities-to-deposit ratio seek to increase lending in pursuit of higher margins, and therefore tend to competitively slash their interest rates (according to “Financial System Report” by BOJ, April 2017).

Net noninterest income (= net fees and commissions + net trading income + net other operating income)

Noninterest income mainly comprises fee income. As a dwindling yield on loans pushed non-consolidated net interest income down from JPY42.4bn in FY03/12 to JPY34.3bn in FY03/21, Hokkoku Bank has adopted a strategy of driving income growth by expanding fees and commissions, including from fee businesses. Its high ratio of net noninterest income (= net

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 21 noninterest income/core gross profit) is the result of its move from an income structure centered on lending to one with a greater diversity of businesses. In other words, the bank has successfully shifted away from a traditional banking business model. Its ratio of net noninterest income has steadily increased over the last five years from 13.3% in FY03/15 to 16.3% in FY03/21. The ratio of net noninterest income to core gross profit in FY03/20 of 16.1% topped the average of 13.8% for the 64 regional banks.

Ratio of net noninterest income

Net noninterest income, % of core GP FY12/03 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 (non-consolidated; JPYmn) Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Net noninterest income, % of core GP 12.9% 13.0% 13.7% 13.3% 11.9% 12.5% 13.0% 14.3% 16.1% 16.3% Core gross profit 48,669 46,951 46,384 47,162 46,414 43,949 45,041 41,509 41,584 40,954 Net interest income 42,405 40,845 40,011 40,887 40,881 38,457 39,197 35,556 34,876 34,259 Non-interest income 6,264 6,106 6,373 6,275 5,533 5,492 5,844 5,953 6,708 6,695

Source: Shared Research based on bank data

Cost structure

General and administrative expenses can be broadly divided into non-personnel and personnel expenses and taxes. Non- personnel expenses include rent and repair costs for branches, system-related expenses, and deposit insurance premiums. The following table shows the breakdown of non-consolidated general and administrative expenses. “Other” includes deposit insurance premiums paid under the deposit insurance system. The effective deposit premium rate currently stands at 0.031%, translating into an expense of JPY310mn per JPY1tn in deposits.

Deposit insurance premiums: Under the deposit insurance system, financial institutions pay deposit insurance premiums to the Deposit Insurance Corporation of Japan to protect their deposits—up to a certain amount—in the event of bankruptcy. Up to JPY10mn in ordinary deposits and time deposits are protected per depositor per financial institution. The effective deposit insurance premium rate was set at a high 0.084% in the wake of the collapse of Japan’s bubble economy in the 1990s, but has been lowered significantly since FY2015, reaching 0.033% in FY2019 and 0.031% in FY2021.

OHR (Over Head Ratio) and expense ratio

OHR represents general and administrative expenses as a proportion of core gross profit. A low OHR implies a bank generates large profit with low expenses, pointing to high efficiency. The expense ratio is calculated by dividing general and administrative expenses by total assets. The non-consolidated OHR stood at 71.2% in FY03/21. Although Hokkoku Bank’s non- consolidated OHR of 70.8% in FY03/20 exceeded the average 69.7% for the 64 regional banks, its OHR has averaged 64.8% over the last 10 years, compared with 66.9% for the average of 64 regional banks. The bank’s expense ratio has averaged 0.74% for the last 10 years, compared with a 0.81% for the average of 64 regional banks.

General and administrative expenses (non-consolidated)

SG&A expenses FY03/11 FY12/03 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 (non-consolidated; JPYmn) Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. SG&A expenses 30,783 31,185 29,189 30,306 29,809 29,486 30,320 Salaries and allowances 12,018 11,636 11,376 11,352 11,468 11,390 11,230 Retirement benefit expenses 1,928 1,517 1,376 2,014 1,985 1,765 1,412 Statutory welfare expenses 126 119 121 142 121 134 118 Depreciation 2,056 2,435 3,587 3,632 3,754 3,801 4,012 Amortization of goodwill 3 3 3 3 3 3 3 Rents and rental fees 644 647 598 602 590 573 587 Building and repair expenses 129 102 134 119 148 92 95 Consumables expense 651 805 418 654 484 360 517 Utilities expenses 324 330 291 277 285 291 276 Travel expenses 62 53 50 59 77 108 106 Commutation expenses 796 726 692 720 680 692 871 Advertising expenses 598 467 459 424 240 352 564 Dues and taxes 1,625 2,181 1,862 1,819 1,946 1,879 2,098 Other 9,818 10,158 8,216 8,484 8,022 8,041 8,426

Source: Shared Research based on bank data

OHR and expense ratio

Overhead ratio (core gross profit- FY03/11 FY12/03 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 based) (%) Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Hokkoku Bank 64.9% 62.5% 63.6% 64.2% 64.3% 61.3% 65.5% 62.9% 68.1% 70.8% 71.2% 64 regional banks 65.3% 66.0% 66.1% 66.2% 65.9% 65.4% 68.4% 67.7% 68.7% 69.7% - Hokuriku Bank 60.9% 61.3% 61.8% 65.7% 65.9% 64.6% 66.1% 66.7% 67.2% 68.4% 65.8% Toyama Bank 77.4% 77.4% 87.9% 80.3% 80.1% 78.4% 85.2% 82.2% 77.9% 83.4% 81.6% Fukui Bank 60.0% 62.2% 65.2% 70.4% 73.2% 77.5% 81.8% 87.5% 87.0% 85.0% 80.9%

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 22 General and administrative expense FY03/11 FY12/03 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 ratio (%) Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Hokkoku Bank 0.96% 0.90% 0.86% 0.85% 0.73% 0.73% 0.67% 0.60% 0.56% 0.58% 0.53% 64 regional banks 1.02% 0.94% 0.88% 0.85% 0.80% 0.78% 0.74% 0.71% 0.69% 0.68% - Hokuriku Bank 0.89% 0.89% 0.81% 0.78% 0.75% 0.71% 0.66% 0.61% 0.59% 0.56% 0.45% Toyama Bank 1.30% 1.28% 1.33% 1.20% 1.13% 1.10% 1.09% 0.99% 0.96% 1.09% 0.98% Fukui Bank 0.92% 0.91% 0.93% 0.90% 0.87% 0.85% 0.81% 0.83% 0.75% 0.71% 0.62%

Source: Shared Research based on materials published by Hokkoku Bank and the Regional Banks Association of Japan

Capital adequacy ratio (international standard)

Regulations governing capital adequacy ratio

Because it operates an overseas branch in Singapore, Hokkoku Bank is subject to international capital adequacy ratio requirements specified by the Basel Committee on Banking Supervision (BCBS). This means the bank needs to pursue profit (≂ interest on loans and discounts - interest on deposits - (general and administrative expenses [≂ personnel expenses + non-personnel expenses]) while maintaining a capital adequacy ratio (capital/risk-weighted assets) of at least 10.5%.

To prevent its capital adequacy ratio from declining, the bank must expand its capital at a faster pace than its assets. Because capital expansion (excluding capital increases through stock offerings and dividends) equals to increases in retained earnings, capital growth (capital increase/capital) fluctuates in parallel with ROE (profit/shareholder’s equity). Accordingly, the bank needs to improve ROE to increase its capital adequacy ratio. However, because ROE is a function of ROA and financial leverage, rises in the capital adequacy ratio lower ROE, which means the bank needs to improve ROA to a greater extent than necessary to offset the decline in ROE. To expand ROA (≂ profit/assets) ≂ (gross profit/assets) x (1 - overhead ratio [OHR= expenses/gross profit]), the bank can pursue two strategies: increase ROA itself or reduce OHR.

To maintain its capital adequacy ratio at the required level, Hokkoku Bank continues to cut expenses in an effort to lower OHR, while at the same time focusing on noninterest income transactions in new businesses such as Consultation services, Bank cards, and Leasing.

Capital adequacy ratio

Capital ratio (international standard) FY12/03 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 (JPYmn) Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Cons. [1] Total capital ratio [4]/[7] 13.62% 13.69% 13.06% 11.72% 12.98% 12.60% 12.32% 11.78% 10.30% 13.04% [2] Tier 1 capital ratio [5]/[7] 11.62% 11.79% 11.76% 11.24% 9.65% 11.41% [3] Common Equity Tier 1 ratio [6]/[7] 11.61% 11.78% 11.76% 11.23% 9.65% 11.40% [4] Total capital [4]/[7] 232,180 241,107 262,127 264,462 236,482 303,112 [5] Tier 1 capital 208,002 225,602 250,307 252,195 221,604 265,248 [6] Common Equity Tier 1 207,737 225,420 250,151 252,068 221,504 264,952 [7] Risk-weighted assets 1,394,738 1,413,743 1,524,966 1,711,241 1,788,624 1,912,390 2,126,757 2,243,467 2,294,518 2,323,363 Non-cons. [1] Total capital ratio [4]/[7] 13.20% 13.11% 12.46% 11.18% 12.81% 12.46% 12.19% 11.59% 10.10% 12.73% [2] Tier 1 capital ratio [5]/[7] 11.50% 11.66% 11.64% 11.06% 9.46% 11.11% [3] Common Equity Tier 1 ratio [6]/[7] 11.50% 11.66% 11.64% 11.06% 9.46% 11.11% [4] Total capital [4]/[7] 225,938 235,556 256,801 257,982 229,851 293,657 [5] Tier 1 capital 202,815 220,449 245,269 246,246 215,441 256,186 [6] Common Equity Tier 1 202,815 220,449 245,269 246,246 215,441 256,186 [7] Risk-weighted assets 1,373,202 1,391,773 1,494,303 1,682,763 1,763,466 1,889,509 2,105,583 2,225,287 2,275,381 2,305,693

Source: Shared Research based on bank data Business model reform process Start of reforms that would span 20 years

Core operating profit was roughly JPY22.9bn in FY03/97, but fell sharply to roughly JPY17.5bn in FY03/01 due to ballooning costs for NPL disposals. This came at a time when the traditional banking business model was being shaken up by the surge in NPL disposal costs in the wake of the collapse of the bubble economy and by the Financial System Reform, “Japanese Big Bang.” In autumn 2000, Hokkoku Bank conducted customer interviews on a large scale, receiving feedback such as “we do not expect services beyond lending and money collection from Hokkoku Bank” and “although companies face many problems, how can Hokkoku Bank help them resolve these?” The surprisingly low expectations from customers alarmed the bank, which feared it would become unable to discern the needs of its customers if it did not change its course. Hokkoku Bank subsequently decided to thoroughly reform its organization and employee mindset, and started laying the groundwork for a transformation into a more customer-oriented bank.

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 23 Overhaul of business model based on IT strategy that included office work reform

The customer focus envisioned by Hokkoku Bank is being realized by providing support for customer operations and elevating customer satisfaction. The bank believed that customer-centric management was a prerequisite for sustainable operations, and this became the core policy driving the reforms. To achieve customer-centric management, the bank needed to break away from a rigid organization. It also realized it had to encourage its results-oriented and reserved employees to be more outgoing to customers, and that having employees experience how changes in work practices can enhance productivity would be a more effective approach to achieve this goal than simply trying to boost morale. To produce visible productivity gains, the bank put a revamped IT system strategy that included a review of office work at the center of its reforms.

The reforms of bank office work also led to an examination of existing branches. From 2000, Hokkoku Bank transitioned from a comprehensive banking system that facilitated transactions for individual and corporate customers across all branches to an area-specific sales structure. The latter entailed the establishment of a few main branches that handle both individual and corporate transactions, and multiple satellite branches that mainly cater to individual customers. The bank continued to eliminate or consolidate branches following its organizational review, scaling down its domestic branches (including sub- branches) by nearly 40% from 155 at end-FY03/98 to 94 (excluding 11 branch-in-branches) at end-FY03/21.

At the same time as the review of its branch network, the bank consolidated its office work. To transform its branches from places for office work to places for consultation and sales activities, the bank consolidated office work processes into a designated center, and sped up workflows by shifting to paperless operations and increasing operational visibility.

Overview of bank office work reforms (including consolidation of work)

Category Description Objectives & Effects

・2007: Start of project to consolidate and simplify office work at branches in the center ・Convert b ranches from places for office work to consultation and sales venues ・Consolidate and take over sales-related off ice work into the designated Consolidation of office work center, consolidate document (notification of loss, notification of change of registered information) related work → register images and make available online to all branches ・Consolidate bank p assbook, certificate, and card reissuance related work into the designated center ・Reduce office work burden at branches ・ ・Consolidate and store bra nch-related supporting documents in file center Shift to paperless operations at branches Consolidation of document ・ ・As a basic rule, consolidate documents in file center, and do not store them Mitigate office work-related risk by storage at branches moving such tasks to the specialized units ・Mitigate risk of data loss due to ・Abolish or reduce office work that is overly ineffective (tolerate some office erroneous disposal of data or other factors work-related risks) Simplification and ・Abolish slip verificatio n (receipt seal, approval seal, verification seal (x)) → rationalization of office work abolish double checks ・Ensure all branches c an accept various notifications online

・Introduce office equipment and systems that facilitate consolidation ・Introduce management system to consolidate various notices Mechanization and systems ・Launch systems to support sales of financial products, and ac hieve adoption paperless operations for documents received from customers ・Use tablet PCs

Review of systems development

In 2000, Hokkoku Bank outsourced the development and operation of its core banking system to a major software vendor. The rationale behind this approach was to free employees from cumbersome IT development and operation tasks, allowing them to focus on their own responsibilities. However, over the course of the following two years, the bank realized that fully outsourcing IT systems development to—or collaborating on such development with—an external vendor with little knowledge of banking operations resulted in development delays, reduced originality, and gave rise to an undesirable mindset among employees who regarded systems as an “external component.” The absence of a sense of ownership in particular diluted internal checks on system development outsourcing costs. In 2007, the bank changed its outsourcing contract and brought systems development in-house.

As part of a reform of its systems development, the bank temporarily shut down its IT systems division (the division was restored later) by 2008 and integrated it into its general planning division. It took this drastic measure to close a perceived gap between management and IT operations, which were a central part of the bank’s operations. By involving employees focused on systems development in a review of systems development from a management and business strategy perspective, the bank managed to build relationships that facilitated mutual proposals.

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 24 Double Productivity Initiative

In 2009, Hokkoku Bank launched the “Double Productivity Initiative,” which aimed to increase work visibility, create new rules, and have all divisions identify, discuss, and find creative solutions to the productivity bottlenecks they faced. However, as the initiative kicked off, many divisions cited worker shortages and only optimized their own workflows, resulting in only partial optimization. Transforming its employee mindset therefore became a priority for the bank.

The “Double Productivity Initiative” was driven in large part by two key measures: 1) the adoption of tablet computers and the overhaul of groupware, and 2) reforms of the screening division, which worked the longest hours in the bank. To establish management practices that could elevate productivity across its entire organization, the bank had to build an environment that could support transparent workflows, paperless operations, and access to information by all employees at the same time. In 2012, Hokkoku Bank adopted a non-customized version of the POWER EGG 2.0 groupware, which allowed employees not only to manage emails, workflows, files, and database usage, but also to visualize schedules and business progress. Also with organization-wide search functionality, employees can pull up various data on all employees such as which meetings they had attended, which comments they had offered, and to what extent they had become involved in certain initiatives, by simply typing in employee names. The adoption of the groupware accelerated efficiency improvements, and allowed the bank to cut its paper-based document volume from 3.3mn sheets in FY03/15 to 1.0mn sheets in FY03/20 (according to the bank’s disclosure brochure).

Under a traditional banking model, a screening division is expected to act as a brake for branches, which are eager to make loans. However, in the belief that banks should take risks and in an effort to prevent loans from being held up by a screening division, Hokkoku Bank transferred decision-making authority for loans to branches, and built reporting and monitoring systems to deal with higher risks. The bank thought its branches were best positioned to understand customer businesses by virtue of working on the frontlines. It adopted a new stance on the screening division, directing it to share its experience and expertise with the consultation services team to provide advice on management problems and business plans to customers. The screening division underwent drastic reforms, reducing its loan approval documents by over 80%, and shortening the time required to finalize loan approval within the organization by more than 50%. As a result, monthly overtime per employee declined from 15 hours and 28 minutes in FY03/08 to 8 hours and 53 minutes in FY03/15, and further to 3 hours and 24 minutes in FY03/20 (according to its disclosure documents).

Focus shift of personnel evaluation from each employee to team collaboration

Sales quotas are commonly used for sales representatives as performance metrics in a range of industries. Hokkoku Bank abolished sales quotas as part of its reforms. More specifically, the bank eliminated sales targets that are unilaterally imposed on sales personnel by headquarters or immediate supervisors. Instead, it introduced a system under which sales staff set their own targets that exceed present performance and cannot be achieved without effort. In making this change, the bank aimed to promote self-reflection (why was a target not achieved, was the strategy flawed, were market trends misread, etc.) and promote a plan-do-check-act (PDCA) cycle to determine the next steps to take. By emphasizing growth through the application of lessons learned toward the resolution of future problems, and by encouraging the process of discussing and resolving targets—hitherto managed by each employee—with team members, the bank aimed to foster a culture that facilitates spontaneous communication and collaboration among employees. This intention is also reflected in the name of the current medium-term business plan “Communication x Collaboration x Innovation 2024.”

Move to core banking system based on open standards and migration to cloud

To transition to a customer-centric business model, Hokkoku Bank realized it needed to overhaul its core banking system. In 2012, it decided to transition from a robust hosted computer system to a windows-based system that utilized open standards, and it completed the migration in 2015. The bank had considered post-reform system operation, and concluded that migration from a third-generation online system to a system based on open standards was necessary to link up with external services.

In 2019, Hokkoku Bank became the first Japanese bank to migrate its online banking services to the cloud (with the release of Hokkoku Cloud Banking). It also adopted Bank Vision, an open-standard core banking system package supplied by Nihon Unisys, as its core banking system, and decided to move the system to a public cloud service (Microsoft Azure). This made it the first Japanese bank to run all its systems in the cloud, with the move completed in May 2021. Materials published by the

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 25 BOJ show that only 3.3% of Japanese banks had moved their core banking system to a public cloud service as of end-March 2019 (see table below), which is further evidence of Hokkoku Bank’s progressive mindset.

Cloud adoption by financial institutions Migration of core banking system to the cloud by financial institutions

Category End-FY2015 End-FY2016 End-FY2017 End-FY2018 YoY change Total (incl. securities, insurance, other) 37.7% 44.3% 46.7% 52.9% 6.2% City and trust banks 100.0% 100.0% 100.0% 100.0% - Regional banks 76.2% 81.8% 85.5% 85.0% -0.5% Second-tier regional banks 56.8% 71.1% 74.3% 93.9% 19.6% Online banks 70.0% 82.0% 84.6% 90.0% 5.4% Shinkin banks 15.3% 20.6% 22.7% 26.6% 3.9% Credit unions 14.6% 13.1% 13.8% 21.4% 7.6%

Source: Shared Research based on BOJ’s “Workshop on IT-powered Enhancement of Finance (Phase 3)” (Third meeting: “Strategic Cloud Utilization”)

Migration of core banking system to the cloud by financial institutions

End-FY2017 Public cloud Community cloud Private cloud Not migrated Banks 2.1% 1.4% 4.3% 92.1% Life and nonlife insurance, securities, 11.6% 10.1% 18.8% 62.3% credit card End-FY2018 Public cloud Community cloud Private cloud Not migrated Banks 3.3% 3.3% 3.8% 89.6% Life and nonlife insurance, securities, 12.5% 3.8% 27.5% 56.3% credit card

Source: Shared Research based on BOJ’s “Workshop on IT-powered Enhancement of Finance (Phase 3)” (Third meeting: “Strategic Cloud Utilization”), and the FISC Financial Institution Survey.

First-mover advantages through adoption of next-generation technology

In addition to its core banking system, Hokkoku Bank plans to move its information systems such as customer relationship management and loan support to a public cloud service to improve management efficiency, reduce costs, enhance its AI- powered consulting functions, and support the adoption of digital solutions by customers in the future, thus contributing to regional revitalization. The bank expects to eventually reduce its on-premises information systems to 20–30% of their current size. The FSA has researched the effects of the adoption of next-generation technology by regional banks on their core operating profit, and the results are outlined in the following diagram. The upshot is that such technologies should increase core operating profit by lifting income while reducing general and administrative expenses and other costs. The deployment of IT systems has been a central component of Hokkoku Bank’s business model reforms, and Shared Research thinks it is leading the industry in this respect.

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 26 Benefits and effects of next-generation technologies

Source: Shared Research based on “Examination of Regional Banks’ New Business Models that Employ Next-Generation Technologies” by Financial Research Center (FSA institute)

Reforms and achievements to date

Hokkoku Bank has pushed through business reforms centered on moving its core banking system to the cloud, digitalizing its Banking business, and strengthening noninterest income transactions (such as in the Consultation services business), and it has been at the forefront of such innovation in the banking industry. The reforms have contributed to growth in profit, which rose to JPY10.9bn in FY03/17 and to JPY10.2bn in FY03/18, topping the JPY10.0bn mark. In FY03/19–FY03/21, profit fell on heavy investment in IT and growth in the amount of NPL disposals. Shared Research understands cost reduction effects will emerge in the future as the bank continues to digitalize its operations.

The following table compares Hokkoku Bank to other regional banks in terms of profit ratio of customer services and profit ratio of loans. Profit ratio of customer services has continued to decline both for Hokkoku Bank and its peers. As of FY03/11, it was already negative for Fukui Bank and the Bank of Toyama. The downtrend has been mainly driven by shrinking deposit- lending margins, slow progress in expanding noninterest income transactions, and a failure to decisively reduce general and administrative expenses. The profit ratio of customer services is expected to turn negative for over 60% of Japanese regional banks in FY03/25 (according to the “FY2015 Finance Report” by the FSA).

Profit ratios of customer services and loans

Profit ratio of customer services FY03/11 FY12/03 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 (%) Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Hokkoku Bank 0.33% 0.35% 0.29% 0.25% 0.18% 0.19% 0.15% 0.12% 0.13% 0.09% 0.04% Hokuriku Bank 0.46% 0.37% 0.36% 0.24% 0.24% 0.22% 0.15% 0.13% 0.12% 0.12% 0.12% Toyama Bank -0.52% -0.48% -0.61% -0.51% -0.44% -0.39% -0.37% -0.20% -0.14% 0.55% 0.36% Fukui Bank -0.13% -0.16% -0.16% -0.14% -0.10% -0.12% -0.09% -0.10% -0.04% 0.00% 0.11% Profit ratio of lending services FY03/11 FY12/03 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 (%) Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Hokkoku Bank 0.04% 0.06% 0.02% -0.01% -0.08% -0.04% -0.10% -0.12% -0.10% -0.13% -0.16% Hokuriku Bank 0.17% 0.12% 0.11% 0.02% -0.03% -0.01% -0.03% -0.02% -0.05% -0.05% -0.04% Toyama Bank -0.14% -0.17% -0.41% -0.39% -0.46% -0.45% -0.51% -0.43% -0.39% -0.47% -0.33% Fukui Bank 0.25% 0.17% 0.08% 0.00% -0.09% -0.12% -0.19% -0.26% -0.21% -0.19% -0.22%

Source: Shared Research based on financial statements from each bank and the “Analysis of Financial Statements of All Banks” by the Japanese Bankers Association Note: Profit ratio of customer services = net operating profit from customer services (= outstanding loans x deposit-lending margins + net fees and commissions - general and administrative expenses)/deposits Note: Profit ratio of loans = net operating profit of loans (= loans outstanding x deposit-lending margin - general and administrative expenses)/deposits

However, Hokkoku Bank and Hokuriku Bank have continued to hold on to positive ratios, and the gap between their ratios has narrowed compared to 10 years ago (Hokuriku Bank’s ratio was 0.13pp higher than Hokkoku Bank in FY03/11, but only 0.03pp higher in FY03/20). Cost efficiency of banks increases with the scale of the banks. Hokuriku Bank’s total assets of roughly JPY8tn are 1.6x those of Hokkoku Bank, indicating the latter is achieving nearly the same level of efficiency. Fukui Bank has 0.6x (roughly JPY3tn) the total assets of Hokkoku Bank and the Bank of Toyama 0.1x (roughly JPY0.5tn). As is evident from the following table, cost reductions are harder to achieve for smaller banks.

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 27 Meanwhile, the profit ratio of loans has been negative at Bank of Toyama since FY03/11, and turned negative at Hokkoku Bank from FY03/14, and for Hokuriku Bank and Fukui Bank from FY03/15. Due to shrinking deposit-lending margins, growth in lending alone has proved to be insufficient to cover general and administrative expenses.

The gaps in expense ratio and OHR between Hokkoku Bank and Hokuriku Bank are also contracting. Over the last 10 years, Hokkoku Bank’s expense ratio has averaged 0.70%, compared with 0.68% for Hokuriku Bank. Over the same period, Hokkoku Bank’s average OHR was 65.43%, about the same as the 65.35% rate at Hokuriku Bank. In light of the differences in assets size between the banks, we can safely conclude that Hokkoku Bank operates with higher efficiency than Hokuriku Bank.

Expense ratio and OHR

General and administrative expense FY03/11 FY12/03 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 ratio (%) Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Hokkoku Bank 0.96% 0.90% 0.86% 0.85% 0.73% 0.73% 0.67% 0.60% 0.56% 0.58% 0.53% Hokuriku Bank 0.89% 0.89% 0.81% 0.78% 0.75% 0.71% 0.66% 0.61% 0.59% 0.56% 0.45% Toyama Bank 1.30% 1.28% 1.33% 1.20% 1.13% 1.10% 1.09% 0.99% 0.96% 1.09% 0.98% Fukui Bank 0.92% 0.91% 0.93% 0.90% 0.87% 0.85% 0.81% 0.83% 0.75% 0.71% 0.62%

Overhead ratio (core gross profit- FY03/11 FY12/03 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 based) (%) Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Hokkoku Bank 64.9% 62.5% 63.6% 64.2% 64.3% 61.3% 65.5% 62.9% 68.1% 70.8% 71.2% Hokuriku Bank 60.9% 61.3% 61.8% 65.7% 65.9% 64.6% 66.1% 66.7% 67.2% 68.4% 65.8% Toyama Bank 77.4% 77.4% 87.9% 80.3% 80.1% 78.4% 85.2% 82.2% 77.9% 83.4% 81.6% Fukui Bank 60.0% 62.2% 65.2% 70.4% 73.2% 77.5% 81.8% 87.5% 87.0% 85.0% 80.9%

Source: Shared Research based on financial statements from each bank and the “Analysis of Financial Statements of All Banks” by the Japanese Bankers Association

Hokkoku Bank’s labor productivity (= core gross profit/number of employees) has been at CAGR of -0.4% for the last 10 years in part due to a downtrend in core gross profit, but the pace of decline has been slower than at rivals Hokuriku Bank (-1.0%) and Fukui Bank (-3.2%). Hokkoku Bank sees little prospect of an upturn in core gross profit while its deposit-lending margins continue to shrink, but it is keeping labor productivity steady through reforms of its business model.

Labor productivity

Labor productivity FY03/11 FY12/03 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 (JPYmn) Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Hokkoku Bank 24.2 24.9 24.8 25.2 26.4 26.1 24.6 25.0 23.2 23.6 23.2 Hokuriku Bank 31.1 30.4 28.5 26.8 27.3 26.9 26.3 26.1 26.4 26.5 28.1 Toyama Bank 17.7 18.7 18.5 19.7 21.0 20.2 18.5 18.5 19.9 21.5 19.7 Fukui Bank 26.9 26.7 25.2 23.0 21.9 20.4 19.1 18.5 17.5 18.1 19.3

Source: Shared Research based on financial statements from each bank and the “Analysis of Financial Statements of All Banks” by the Japanese Bankers Association Net interest income (88.5% of non- consolidated core gross profit) Net interest income: deposit and loan transactions, and investment in securities

Non-consolidated interest income breaks down into interest on loans and discounts and interest and dividends on securities, generated from deposit and loan transactions and from investment in securities, respectively. Net interest income accounted for 88.5% of non-consolidated core gross profit in FY03/21.

Loans

Loans outstanding by recipient size and loan type

As of end-March 2021, loans outstanding stood at JPY2.6tn, with 75.9% made to SMEs, and 12.1% to mid-tier and major companies. Hokkoku Bank had borrower companies of 108,983 SMEs with average loan outstanding per company of JPY18.1mn as of FY03/20. By loan type, corporate loans based on business potential accounted for 50.0%, loans made to individual customers for 38.0% (of which 96.4% were housing loans), and loans to local public agencies and corporations for 12.0%.

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 28 Corporate loans based on business potential One of the measures called for by the Japan Revitalization Strategy adopted by the Cabinet in June 2013 was the “promotion of financing by regional financial institutions based on evaluation of business potential.” The 2014 Financial Monitoring Policy released by the FSA in September 2014 similarly made reference to financing based on an evaluation of business potential, stating that “financial institutions should facilitate the growth of companies and industries based on an assessment of borrower companies’ business profiles and growth potential (evaluation of customers’ business potentials), providing financing and advice without overly relying on financial data, collateral and guarantees.” The FSA regards the provision of loans and advice—underpinned by proper judgment—to support the growth of companies and industries as the fundamental role of banks. Banks must evaluate business potential based on information about (1) the management philosophy and vision of the company as well as the capabilities of top management, (2) company strengths that are not necessarily evident in their financial statements, and (3) plans for future business development. To this end, prospective borrower companies need to prepare a business plan that contains the necessary information, and explain it to the bank.

Loans outstanding by borrower size and loan type

Loans outstanding breakdown FY12/03 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 (JPYmn) Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. By size 2,274,730 2,331,905 2,358,615 2,363,132 2,335,593 2,324,495 2,412,919 2,582,965 2,617,944 2,633,905 YoY 2.8% 2.5% 1.1% 0.2% -1.2% -0.5% 3.8% 7.0% 1.4% 0.6% % of total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Small- and medium-enterprises 1,353,652 1,373,889 1,410,924 1,483,199 1,552,045 1,594,966 1,738,723 1,892,171 1,972,824 2,001,257 YoY 3.0% 1.5% 2.7% 5.1% 4.6% 2.8% 9.0% 8.8% 4.3% 1.4% % of total 59.5% 58.9% 59.8% 62.7% 66.4% 68.6% 72.0% 73.2% 75.3% 75.9% Medium-sized and large corporations 353,700 319,700 310,800 291,100 320,900 302,600 317,500 YoY -9.6% -2.8% -6.3% 10.2% -5.7% 4.9% % of total 15.0% 13.7% 13.4% 12.1% 12.4% 11.6% 12.1% Local public agencies and corporations 526,200 463,700 418,700 383,100 369,900 342,500 315,200 YoY -11.9% -9.7% -8.5% -3.4% -7.4% -8.0% % of total 22.3% 19.9% 18.0% 15.9% 14.4% 13.1% 12.0% By attribute 2,274,730 2,331,905 2,358,615 2,363,132 2,335,593 2,324,495 2,412,919 2,582,965 2,617,944 2,633,905 YoY 2.8% 2.5% 1.1% 0.2% -1.2% -0.5% 3.8% 7.0% 1.4% 0.6% % of total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Business loans 1,203,760 1,228,747 1,220,149 1,169,421 1,158,392 1,137,570 1,179,608 1,268,668 1,286,748 1,318,049 YoY 2.4% 2.1% -0.7% -4.2% -0.9% -1.8% 3.7% 7.5% 1.4% 2.4% % of total 52.9% 52.7% 51.7% 49.5% 49.6% 48.9% 48.9% 49.1% 49.2% 50.0% Consumer loans 546,432 570,468 610,426 667,502 713,421 768,156 850,174 944,358 988,604 1,000,632 YoY 3.9% 4.4% 7.0% 9.4% 6.9% 7.7% 10.7% 11.1% 4.7% 1.2% % of total 24.0% 24.5% 25.9% 28.2% 30.5% 33.0% 35.2% 36.6% 37.8% 38.0% Housing loans 529,845 548,920 581,645 634,214 677,626 727,116 807,170 901,824 948,045 964,283 YoY 3.7% 3.6% 6.0% 9.0% 6.8% 7.3% 11.0% 11.7% 5.1% 1.7% % of total 23.3% 23.5% 24.7% 26.8% 29.0% 31.3% 33.5% 34.9% 36.2% 36.6% Other loans 16,587 21,548 28,781 33,288 35,795 41,039 43,004 42,533 40,558 36,348 YoY 10.4% 29.9% 33.6% 15.7% 7.5% 14.7% 4.8% -1.1% -4.6% -10.4% % of total 0.7% 0.9% 1.2% 1.4% 1.5% 1.8% 1.8% 1.6% 1.5% 1.4% Local public agencies 524,538 532,690 528,040 526,209 463,780 418,769 383,137 369,939 342,592 315,224 YoY 2.7% 1.6% -0.9% -0.3% -11.9% -9.7% -8.5% -3.4% -7.4% -8.0% % of total 23.1% 22.8% 22.4% 22.3% 19.9% 18.0% 15.9% 14.3% 13.1% 12.0%

Source: Shared Research based on bank data

Lending trends by industry

By industry (excluding “other”), manufacturing is the top industry as borrower of domestic loans, followed by local government, services, wholesale and retail, and real estate and goods rental and leasing.

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 29 Lending trends by industry

Loans by industry FY12/03 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Japan (ex. special international financial 2,274,730 2,331,905 2,358,615 2,363,132 2,335,593 2,321,972 2,406,090 2,565,840 2,597,412 2,617,781 transactions account) Manufacturing 332,283 342,004 329,534 322,789 314,943 306,328 316,357 331,115 323,722 352,164 % of total 14.6% 14.7% 14.0% 13.7% 13.5% 13.2% 13.1% 12.9% 12.5% 13.5% Agriculture and forestry 7,362 7,140 6,437 7,302 7,106 7,406 8,506 8,127 9,556 8,237 % of total 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.4% 0.3% 0.4% 0.3% Fisheries 434 455 1,202 1,355 1,382 1,668 1,713 1,034 946 857 % of total 0.0% 0.0% 0.1% 0.1% 0.1% 0.1% 0.1% 0.0% 0.0% 0.0% Mining and quarrying of stone and gravel 660 692 556 587 10,584 10,605 10,508 9,928 8,539 7,489 % of total 0.0% 0.0% 0.0% 0.0% 0.5% 0.5% 0.4% 0.4% 0.3% 0.3% Construction 105,824 103,252 100,842 99,514 102,511 107,549 117,444 126,067 129,760 134,619 % of total 4.7% 4.4% 4.3% 4.2% 4.4% 4.6% 4.9% 4.9% 5.0% 5.1% Electricity, gas, heat supply, and water 38,771 37,715 35,738 33,389 33,559 33,509 31,598 31,693 31,844 30,754 % of total 1.7% 1.6% 1.5% 1.4% 1.4% 1.4% 1.3% 1.2% 1.2% 1.2% Information and communications 22,023 21,811 21,309 19,733 17,093 14,690 12,910 13,275 12,223 13,468 % of total 1.0% 0.9% 0.9% 0.8% 0.7% 0.6% 0.5% 0.5% 0.5% 0.5% Transport and postal services 47,297 46,690 47,534 44,695 41,925 41,010 40,745 43,871 42,635 46,415 % of total 2.1% 2.0% 2.0% 1.9% 1.8% 1.8% 1.7% 1.7% 1.6% 1.8% Wholesale and retail trade 252,118 253,520 244,587 229,591 228,662 223,252 225,274 244,759 254,734 246,216 % of total 11.1% 10.9% 10.4% 9.7% 9.8% 9.6% 9.4% 9.5% 9.8% 9.4% Finance and insurance 109,544 115,400 116,752 95,668 71,965 62,351 55,727 50,973 42,428 39,128 % of total 4.8% 4.9% 5.0% 4.0% 3.1% 2.7% 2.3% 2.0% 1.6% 1.5% Real estate and goods rental and leasing 153,061 156,659 167,472 170,497 170,489 163,804 173,231 201,138 214,351 211,260 % of total 6.7% 6.7% 7.1% 7.2% 7.3% 7.1% 7.2% 7.8% 8.3% 8.1% Services 213,516 217,384 226,101 238,133 237,313 249,258 270,990 293,214 303,296 318,875 % of total 9.4% 9.3% 9.6% 10.1% 10.2% 10.7% 11.3% 11.4% 11.7% 12.2% Local public agencies 477,885 495,265 491,284 480,416 438,626 390,920 355,567 337,854 308,534 282,914 % of total 21.0% 21.2% 20.8% 20.3% 18.8% 16.8% 14.8% 13.2% 11.9% 10.8% Other 513,948 533,913 569,260 619,455 659,427 709,615 785,513 872,786 914,838 925,379 % of total 22.6% 22.9% 24.1% 26.2% 28.2% 30.6% 32.6% 34.0% 35.2% 35.3%

Source: Shared Research based on bank data

Long versus short-term, floating versus fixed-rate, term, and purposes of loans

A closer look at Hokkoku Bank’s outstanding loans in Japan in FY03/20 reveals that long-term loans (loans on deeds) accounted for 81.5%, fixed-rate loans for 75.8%, and loans with a remaining loan maturity of seven years or more for 58.0%, according to the bank’s disclosure materials. The bank’s loan portfolio has become increasingly skewed toward long-term and fixed-rate loans due to the continued low-interest rate climate and efforts to lock in customers. By purpose of loans, 48.6% of the loans are used to fund capital expenditures and 51.4% are used as part of working capital.

Stepping up lending in neighboring prefectures

In addition to Ishikawa Prefecture, its home territory, Hokkoku Bank also makes loans in the neighboring Toyama and Fukui Prefectures. At end-March 2021, its loans outstanding in the three Hokuriku prefectures were JPY2.4tn. Ishikawa Prefecture accounted for 69.0% (JPY1.8tn) of total outstanding loans, Toyama Prefecture for 17.9% (JPY471.8bn), and Fukui Prefecture for 4.6% (JPY120.2bn). The bank’s loans outstanding were down 0.2% YoY in Ishikawa Prefecture, up 2.1% in Toyama Prefecture, and up 3.2% in Fukui Prefecture.

Lending trends in three Hokuriku prefectures

Cross border loans FY12/03 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 (JPYmn) Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Loans outstanding (non-consolidated) 2,274,730 2,331,905 2,358,615 2,363,132 2,335,593 2,324,495 2,412,919 2,582,965 2,617,944 2,633,905 Three Hokuriku prefectures 1,938,600 1,972,800 2,006,500 2,053,000 2,068,600 2,090,100 2,194,200 2,350,800 2,399,000 2,408,900 YoY 1.8% 1.7% 2.3% 0.8% 1.0% 5.0% 7.1% 2.1% 0.4% % of total 85.2% 84.6% 85.1% 86.9% 88.6% 89.9% 90.9% 91.0% 91.6% 91.5% Ishikawa 1,746,800 1,707,100 1,687,200 1,732,700 1,812,800 1,820,200 1,816,700 YoY -2.3% -1.2% 2.7% 4.6% 0.4% -0.2% % of total 73.9% 73.1% 72.6% 71.8% 70.2% 69.5% 69.0% Loans to SMEs 1,163,100 1,171,700 1,178,300 Toyama 245,200 299,100 335,100 381,600 434,300 462,200 471,800 YoY 22.0% 12.0% 13.9% 13.8% 6.4% 2.1% % of total 10.4% 12.8% 14.4% 15.8% 16.8% 17.7% 17.9% Loans to SMEs 197,800 257,200 294,200 Fukui 60,900 62,300 67,800 79,800 103,500 116,500 120,200 YoY 2.3% 8.8% 17.7% 29.7% 12.6% 3.2% % of total 2.6% 2.7% 2.9% 3.3% 4.0% 4.5% 4.6% Loans to SMEs 36,500 41,600 47,200 Other 336,000 359,000 352,100 310,000 266,800 234,300 218,700 232,100 218,900 225,000

Source: Shared Research based on bank data

Interest-earning assets, interest-bearing liabilities, and yields

Net interest income is the difference between interest income and interest expenses. Interest income mainly comprises interest on loans and discounts and interest and dividends on securities, which are generated by investing funds raised through deposits into loans and securities. Interest expenses mainly include interest on deposits paid to raise funds. The bank

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 30 reported net interest income of JPY34.9bn in FY03/20, mainly from JPY26.0bn in interest on loans and discounts (excluding interest on deposits) and JPY10.3bn in interest and dividends on securities.

Interest on loans and discounts and interest on securities are obtained by subtracting interest expenses (average balance of assets under management [average for start and end of fiscal year] multiplied by interest on funds raised) from interest income (average balance of assets under management multiplied by interest on each asset). The following table shows trends in interest-earning assets, interest-bearing liabilities, and yields.

Interest-earning assets, interest-bearing liabilities, interest and yields

Investment and funding (Japan) FY03/11 FY12/03 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 (JPYmn) Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Average balance Total investment management account 3,028,976 3,103,702 3,109,227 3,166,945 3,448,234 3,841,800 3,802,995 4,058,614 4,480,353 4,555,324 Loans outstanding 2,107,572 2,164,491 2,226,425 2,288,930 2,352,372 2,314,281 2,277,643 2,332,051 2,440,942 2,522,500 Commodity-linked securities 1,016 393 495 447 924 934 538 155 106 103 Securities 761,011 825,746 803,226 804,735 1,024,859 1,030,842 955,970 930,232 941,578 894,313 Call loans 107,465 88,661 64,630 48,753 59,838 10,544 103,754 328,623 582,634 638,859 Deposits 17,564 1,114 1,103 946 696 473,951 413,418 411,191 411,241 410,034 Capital finance accounts 2,928,956 3,003,275 3,004,836 3,065,796 3,460,502 3,728,671 3,712,445 4,059,878 4,486,424 4,568,651 Deposits 2,798,686 2,830,211 2,879,981 2,956,966 3,027,581 3,027,869 3,108,556 3,245,417 3,377,792 3,501,397 Negotiable deposits 111,719 153,853 138,925 122,119 121,941 111,524 95,981 96,705 85,198 110,172 Call money 54 246 2,246 150,512 251,644 163,284 451,242 807,804 836,262 Payables under repurchase agreements 45,682 77,241 Payables under securities lending transactions 167,559 345,293 349,849 229,175 148,902 132,656 Borrowings 8,510 10,636 11,082 9,285 7,792 7,212 5,851 4,434 2,733 1,246 Interest Total investment management account 46,373 45,407 42,333 40,514 42,555 42,850 40,119 41,590 39,206 36,189 Loans outstanding 36,855 35,312 33,131 31,527 30,476 29,799 28,238 26,610 26,013 25,786 Commodity-linked securities 5 3 2 1 2 2 0 0 0 0 Securities 9,264 9,927 9,085 8,908 11,849 12,529 11,159 14,008 11,701 8,836 Call loans 117 94 68 52 87 25 -13 181 124 -37 Deposits 35 1 1 7 121 474 411 409 407 406 Capital finance accounts 4,629 3,609 2,169 1,223 1,531 1,836 1,969 2,609 3,716 1,716 Deposits 3,624 2,595 1,730 869 753 704 559 393 340 297 Negotiable deposits 160 192 149 91 71 55 22 18 9 10 Call money 0 0 2 204 202 120 616 658 211 Payables under repurchase agreements 671 1,750 Payables under securities lending transactions 154 358 804 668 137 365 Borrowings 58 59 59 54 50 46 34 20 15 8 Yield Total investment management account 1.53% 1.46% 1.36% 1.27% 1.23% 1.11% 1.05% 1.02% 0.87% 0.79% Loans outstanding 1.74% 1.63% 1.48% 1.37% 1.29% 1.28% 1.24% 1.14% 1.06% 1.02% Commodity-linked securities 0.49% 0.87% 0.47% 0.43% 0.22% 0.27% 0.12% 0.33% 0.33% 0.18% Securities 1.21% 1.20% 1.13% 1.10% 1.15% 1.21% 1.16% 1.50% 1.24% 0.98% Call loans 0.10% 0.10% 0.10% 0.10% 0.14% 0.24% -0.01% 0.05% 0.02% 0.00% Deposits 0.19% 0.09% 0.11% 0.76% 17.42% 0.10% 0.10% 0.10% 0.09% 0.09% Capital finance accounts 0.15% 0.12% 0.07% 0.03% 0.04% 0.04% 0.05% 0.06% 0.08% 0.03% Deposits 0.12% 0.09% 0.06% 0.02% 0.02% 0.02% 0.01% 0.01% 0.01% 0.00% Negotiable deposits 0.14% 0.12% 0.10% 0.07% 0.05% 0.04% 0.02% 0.01% 0.01% 0.01% Call money 0.10% 0.10% 0.10% 0.13% 0.08% 0.07% 0.13% 0.08% 0.02% Payables under repurchase agreements 1.47% 2.26% Payables under securities lending transactions 0.09% 0.10% 0.23% 0.29% 0.09% 0.27% Borrowings 0.68% 0.55% 0.54% 0.58% 0.64% 0.63% 0.58% 0.45% 0.56% 0.68%

Source: Shared Research based on Hokkoku Bank’s securities reports

The bank’s interest-earning assets have expanded at a CAGR of 4.2% over the last 10 years, while its loans have increased at a CAGR of 1.8%. Much of the growth in interest-earning assets has been driven by the bank’s current account deposits at the BOJ (held under a current account contract) and call loans. In interest-bearing liabilities, deposits have increased at a CAGR of 2.3%, but borrowed money (such as borrowed money from the BOJ or other financial institutions, and overdrafts) has fallen sharply.

Analysis of interest received and interest paid

From FY03/11 to FY03/20, interest on loans and discounts fell JPY11.1bn, and interest paid on deposits and negotiable certificates of deposit (NCDs) was down JPY3.5bn, driven by a downtrend in interest rates during the period. The yield on loans declined 0.72pp from 1.74% in FY03/11 to 1.02% in FY03/20. Upon closer analysis, we find the declines in interest received and interest paid can be attributed to account balance effects and interest rate effects, with the latter outweighing the former. As noted below, the bank’s interest received from loans has declined significantly due to a drop in its yield on loans.

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 31 Factors driving change in interest income and expenses: account balance versus interest rate effects

Interest income and expenses (Japan) FY03/11 FY12/03 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 (non-cons. JPYmn) Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Interest income -1,793 -516 -673 -2,536 937 -2,700 -1,330 Increase (decrease) by balance 759 1,393 5,439 -654 2,233 4,456 1,093 Increase (decrease) by rate -2,553 -1,909 -6,112 -1,882 -1,296 -7,157 -2,423 Interest expenses -943 -99 83 -485 -420 -378 -38 Increase (decrease) by balance 43 85 103 -15 63 28 -4 Increase (decrease) by rate -986 -185 -19 -470 -484 -407 -34

Source: Shared Research based on bank data

NPLs

Japanese banks are legally required to disclose NPLs they hold under the Banking Act and the Financial Reconstruction Act. Claims disclosed under the Financial Reconstruction Act are referred to as NPLs based on the Financial Reconstruction Act (in addition to loans, includes customers’ liabilities for acceptances and guarantees). Not all disclosed NPLs are irrecoverable. Some portions of NPLs are secured by collateral or guarantees, and other portions are offset by the allowance for loan losses. At end-FY03/21, NPLs based on the Financial Reconstruction Act (non-consolidated) totaled JPY62.0bn, accounting for 2.24% of the bank’s total claims. Its NPL ratio reached a low for the last 10 years.

Status of NPLs based on the Financial Reconstruction Act

NPLs based on the Financial Reconstruction FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 Act (JPYmn) Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Bankrupt or de facto bankrupt 16,897 14,322 12,830 27,030 15,526 10,434 5,965 8,000 11,854 13,287 Doubtful 49,320 66,281 62,865 63,412 58,996 54,399 50,359 47,330 43,872 46,237 Special attention 6,147 764 1,402 1,137 1,210 1,283 1,446 1,305 1,660 2,500 Total (A) 72,365 81,368 77,098 91,580 75,733 66,117 57,771 56,636 57,387 62,025 Total credit (B) 2,304,327 2,358,972 2,383,515 2,486,057 2,441,435 2,392,606 2,488,281 2,654,205 2,707,200 2,767,495 Bankrupt or de facto bankrupt 0.73% 0.60% 0.53% 1.08% 0.63% 0.43% 0.23% 0.30% 0.43% 0.48% Doubtful 2.14% 2.80% 2.63% 2.55% 2.41% 2.27% 2.02% 1.78% 1.62% 1.67% Special attention 0.26% 0.03% 0.05% 0.04% 0.04% 0.05% 0.05% 0.04% 0.06% 0.09% Total (A) / (B) 3.14% 3.44% 3.23% 3.68% 3.10% 2.76% 2.32% 2.13% 2.11% 2.24%

Source: Shared Research based on bank data

40.0% of Hokkoku Bank’s NPLs were protected by collateral or guarantees as of FY03/21. The bank had set aside an allowance for loan losses to cover the JPY36.6bn in unprotected NPLs, and its reserve ratio was 94.21%, up from 91.45% in FY03/20. Its overall coverage ratio was 96.52%. Its coverage ratio was 100% for bankrupt or de facto bankrupt loans, 98.6% for doubtful loans, and 41.13% for special attention loans.

Coverage of disclosed claims

Status of coverage of NPLs on FRA FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 (JPYmn) Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. NPLs based on the Financial Reconstruction Act 72,365 81,368 77,098 77,990 69,129 63,845 56,449 55,397 56,164 60,873 Secured by collateral and guarantees 50,999 52,334 49,964 45,478 38,725 34,302 30,574 28,386 24,156 24,321 % of total (B)/(A) 70.5% 64.3% 64.8% 58.3% 56.0% 53.7% 54.2% 51.2% 43.0% 40.0% Not secured (C) = (A) - (B) 21,365 29,034 27,133 32,512 30,404 29,542 25,874 27,010 32,008 36,551 % of total (C)/(A) 29.5% 35.7% 35.2% 41.7% 44.0% 46.3% 45.8% 48.8% 57.0% 60.0% Provision for loan loss (D) 13,510 18,787 18,371 21,787 26,684 25,477 22,909 24,085 29,272 34,435 % of total (D)/(A) 18.7% 23.1% 23.8% 27.9% 38.6% 39.9% 40.6% 43.5% 52.1% 56.6% Rate of provision (D) / (C) 63.23% 64.70% 67.70% 67.01% 87.76% 86.23% 88.54% 89.16% 91.45% 94.21% Coverage ratio ((B)+(D))/(A) 89.14% 87.40% 88.63% 86.24% 94.62% 93.63% 94.75% 94.71% 95.12% 96.52%

Source: Shared Research based on bank data

Investment in securities

Interest and dividends on securities account for a high ratio of core gross profit, highlighting the bank’s dependency on securities investment. For the 10 years through FY03/20, the ratio averaged 25.4%, above the average of 23.6% for the 64 regional banks. The bank’s dependence on securities investment has increased consistently since FY03/14, advancing to 33.2% in FY03/18. The bank’s securities investment dependency rate stood at 22.5% as of FY03/21.

The balance of securities increased JPY267.9bn YoY in FY03/15, breaking down into increases of JPY142.6bn for foreign bonds, JPY66.3bn for yen denominated bonds, and JPY58.5bn for equities and investment trusts. The ratio of equities and investment trusts remained below 10% through FY03/14, but has since increased to 15–19%.

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 32 Balance of securities investments

Securities investment outstanding FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 (acquisition cost-based (JPYmn) Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Securities investment outstanding (acquisition 862,600 838,100 841,100 1,109,000 961,900 1,037,700 973,400 1,007,500 954,900 1,107,500 cost-based) YoY 0.8% -2.8% 0.4% 31.9% -13.3% 7.9% -6.2% 3.5% -5.2% 16.0% Japanese Yen-denominated bonds 752,800 718,500 695,700 762,000 689,200 644,000 618,700 648,100 662,600 701,200 YoY 2.5% -4.6% -3.2% 9.5% -9.6% -6.6% -3.9% 4.8% 2.2% 5.8% % of total 87.3% 85.7% 82.7% 68.7% 71.6% 62.1% 63.6% 64.3% 69.4% 63.3% (breakdown) Government bonds 3,559 3,487 3,127 3,878 3,784 2,570 - - - - Local government bonds 2,278 2,052 1,966 1,921 1,296 1,629 - - - - Corporate bonds 1,691 1,646 1,864 1,821 1,812 2,241 - - - - Total 752,800 718,500 695,700 762,000 689,200 644,000 - - - - Foreign currency-denominated bonds 46,400 45,500 70,400 213,300 131,000 235,200 168,300 184,800 122,100 225,100 YoY -28.3% -1.9% 54.7% 203.0% -38.6% 79.5% -28.4% 9.8% -33.9% 84.4% % of total 5.4% 5.4% 8.4% 19.2% 13.6% 22.7% 17.3% 18.3% 12.8% 20.3% (breakdown) Foreign securities 46,400 45,500 70,400 213,300 131,000 235,200 - - - - Stocks and mutual funds 63,200 73,800 74,900 133,400 141,600 158,400 186,300 174,600 170,200 181,200 YoY 12.3% 16.8% 1.5% 78.1% 6.1% 11.9% 17.6% -6.3% -2.5% 6.5% % of total 7.3% 8.8% 8.9% 12.0% 14.7% 15.3% 19.1% 17.3% 17.8% 16.4% (breakdown) Stocks 46,900 44,400 45,000 78,100 81,100 93,100 93,300 92,700 91,800 83,700 Other 16,300 29,400 29,900 55,300 60,500 65,300 - - - - Total 63,200 73,800 74,900 133,400 141,600 158,400 - - - -

Source: Shared Research based on bank data

Despite the impact from the COVID-19 pandemic, Hokkoku Bank posted unrealized gains on available-for-sale securities in FY03/21 as the Nikkei Average recovered in February 2021 to the 30,000 point level for the first time since August 1990. The improvement in gains on equities and investment trusts bolstered unrealized gains on securities JPY54.7bn YoY to JPY88.2bn.

Valuation gains/losses

Gains (losses) on valuation of securities FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 (JPYmn) Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Held-to-maturity securities 27 6 1 ------Other securities 38,852 47,200 49,751 79,223 54,640 64,586 84,001 78,406 33,511 88,164 Stocks 22,483 27,877 34,907 57,709 42,171 62,000 87,305 76,699 51,704 88,838 Bonds 15,740 18,442 14,437 13,338 12,487 6,568 4,657 4,057 -593 186 Other 628 881 406 8,175 -19 -3,982 -7,961 -2,350 -17,598 -860 Total 38,879 47,207 49,753 79,223 54,640 64,586 84,001 78,406 33,511 88,164 Stocks 22,483 27,877 34,907 57,709 42,171 62,000 87,305 76,699 51,704 88,838 Bonds 15,767 18,448 14,439 13,338 12,487 6,568 4,657 4,057 -593 186 Other 628 881 406 8,175 -19 -3,982 -7,961 -2,350 -17,598 -860

Source: Shared Research based on bank data

Deposits

At end-March 2021, the bank’s outstanding of deposits stood at JPY4.1tn, with individual deposits accounting for 65.7%, corporate deposits for 27.4%, and public and financial institution deposits for 6.1%. The outstanding balance of deposits has grown at a CAGR of 5.5% for the last three years.

Deposits trend

Breakdown of deposits (inc. NCD) FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 (JPYmn) Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Deposits (incl. NCD) 3,107,914 3,164,635 3,174,562 3,155,197 3,188,655 3,306,839 3,452,266 3,614,553 3,712,689 4,052,047 YoY 4.9% 1.8% 0.3% -0.6% 1.1% 3.7% 4.4% 4.7% 2.7% 9.1% 3-year CAGR 2.3% 0.5% 0.3% 1.4% 3.0% 4.3% 3.9% 5.5% Personal deposits 2,061,376 2,093,361 2,124,961 2,162,086 2,199,999 2,247,498 2,324,776 2,401,959 2,478,127 2,662,691 YoY 1.6% 1.6% 1.5% 1.7% 1.8% 2.2% 3.4% 3.3% 3.2% 7.4% % of total 66.3% 66.1% 66.9% 68.5% 69.0% 68.0% 67.3% 66.5% 66.7% 65.7% Corporate deposits 797,468 806,675 766,286 741,848 749,559 802,612 875,028 918,352 946,143 1,111,766 YoY 9.1% 1.2% -5.0% -3.2% 1.0% 7.1% 9.0% 5.0% 3.0% 17.5% % of total 25.7% 25.5% 24.1% 23.5% 23.5% 24.3% 25.3% 25.4% 25.5% 27.4% Public deposits 230,291 245,438 252,257 226,832 214,355 232,175 228,648 265,168 260,694 248,104 YoY 28.8% 6.6% 2.8% -10.1% -5.5% 8.3% -1.5% 16.0% -1.7% -4.8% % of total 7.4% 7.8% 7.9% 7.2% 6.7% 7.0% 6.6% 7.3% 7.0% 6.1% Financial institution's deposits 18,778 19,158 31,056 24,429 24,741 24,552 23,813 29,073 27,724 29,485 YoY -25.4% 2.0% 62.1% -21.3% 1.3% -0.8% -3.0% 22.1% -4.6% 6.4% % of total 0.6% 0.6% 1.0% 0.8% 0.8% 0.7% 0.7% 0.8% 0.7% 0.7%

Source: Shared Research based on bank data

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 33 Net noninterest income (16.3% of non- consolidated core gross profit)

Hokkoku Bank generates noninterest income from deposits and lending, currency exchange, securities, agency operations, safe custody and safe deposit box, guarantee, and other services. Its ratio of noninterest income rises in tandem with increases in the relative weightings of such services. The bank records fees for various services mentioned above under fees and commissions, and its high ratio of noninterest income is a result of a successful transition from a business structure centered on deposit and lending operations to one with greater diversity.

As noted earlier, the ratio of net noninterest income (percentage of core gross profit) has risen 3.4pp from 12.7% in FY03/11 to 16.1% in FY03/20, compared with an increase of 2.0pp from 11.8% to 13.8% in the average ratio for the 64 regional banks over the same period. This shows that Hokkoku Bank’s fee businesses have expanded steadily. The ratio of net noninterest income to non-consolidated core gross profit in FY03/21 stood at 16.3%. The bank continues aiming to move away from a traditional banking business model geared toward deposit and lending operations and toward a comprehensive financial services model under which it can expand fee businesses.

Move to comprehensive financial services model: Since “Japanese big-bang” deregulation of its financial markets in 1996, the country has reformed many of its financial systems, and pushed ahead with diversification of financial products, services, and sales channels in an effort to respond to household asset building needs and to increasingly heightened funding needs of companies. The banking industry saw the ban on over-the-counter sales of investment trusts lifted in 1998, the ban on securities brokerage services lifted in 2004, and the partial ban on over-the-counter sales of insurance products (which up to that point had only been introduced gradually) fully lifted in 2007. In addition, new systems of trust agent services and bank agent services were implemented, facilitating one-stop shopping for consumers who could now receive a comprehensive range of financial products and services from a single financial institution. The degree to which financial institutions engage in comprehensive financial services can be determined by comparing their noninterest income ratios.

Hokkoku Bank is focusing on its Consultation services, Bank cards, and Leasing businesses to expand noninterest income transactions. In FY03/21, it reported income of JPY611mn (-JPY50mn YoY) in the Consultation services business, JPY941mn (+JPY179mn YoY) in the Bank cards business, and JPY360mn (+JPY28mn YoY) in the Leasing business. Its consolidated medium- to long-term business strategy calls for FY03/26 Consultation services income of JPY2.0bn, Bank cards income of JPY3.4bn, and Leasing income of JPY1.9bn.

Income from new businesses (non-consolidated)

Income from new businesses FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 (JPYmn) Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Income from new businesses (non-cons.) 336 608 884 1,224 1,756 1,912 YoY 81.0% 45.4% 38.5% 43.5% 8.9% % of total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Bank cards 200 275 371 537 762 941 YoY 37.5% 34.9% 44.7% 41.9% 23.5% % of total 59.5% 45.2% 42.0% 43.9% 43.4% 49.2% Leasing 26 88 203 274 332 360 YoY 238.5% 130.7% 35.0% 21.2% 8.4% % of total 7.7% 14.5% 23.0% 22.4% 18.9% 18.8% Consultation 110 245 309 410 661 611 YoY 122.7% 26.1% 32.7% 61.2% -7.6% % of total 32.7% 40.3% 35.0% 33.5% 37.6% 32.0%

Source: Shared Research based on bank data Consultation services

Consultation services to support community-based financing

Japanese regional banks across the board are currently stepping up their consultation services. Since the FSA urged all regional financial institutions to enhance Relationship Banking functions in 2003, regional banks—which operate under a business model rooted in community-based financing—have worked to evaluate business potential, improve the profitability, and support the growth of regional customers. However, the FSA commented in 2016 that “initiatives to provide high-quality, suitable consulting have been insufficient,” pointing to slow progress in related business expansion. Hokkoku Bank launched its Consultation services business in August 2015, and has registered steady growth in the business since.

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 34 Banks’ consultation services: Japanese regional banks’ consultation services were developed in response to the government’s declaration that the state of “relationship banking” is an important aspect of the disposal of NPLs for regional banks (Program for Financial Revival, October 2002). The concept of relationship banking has not been clearly defined, but the term is used to refer to financing services tailored to local communities. In March 2003, the FSA released a document titled “Toward enhancing functions of Relationship Banking” in an attempt to encourage regional banks to enhance relationship banking functions, promote various initiatives to invigorate SMEs and revitalize regional economies, and concurrently solve the NPL problem. In June of the same year, the FSA revised its Guidelines for Administrative Processes, clarifying that consultation and other customer support services performed in the context of relationship banking functions correspond to “ancillary operations” specified in the Banking Act. This paved the way for the development of consultation services by banks. In May 2011, the FSA revised its supervision guidelines, calling on regional financial institutions to adopt a business model centered on community-based financing and positioning the “evaluation of business potential” as an integral part of such a business model. After the release of the Japan Revitalization Strategy in 2015, the FSA in April 2016 stated that regional financial institutions had not yet sufficiently provided high-quality and suitable advisory services despite demand from companies, and it urged such institutions to beef up their community- centric financing operations through consultation services. (“Working Group on Banks’ Financial Intermediation for the Regional Economy,” FSA, April 2016)

Difference between banks’ consultation services and services offered by major consulting firms

Leading consulting firms mainly aim to resolve challenges faced by customers, and are therefore project-driven. Conversely, banks such as Hokkoku Bank offer consultation services that do not necessarily seek to address a single problem, but rather aim to support customers in achieving long-term growth.

Description of consultation services

Hokkoku Bank’s consultation services aim to jointly address and resolve challenges facing customers based on an understanding of their businesses. Its key underlying assumption is that improved corporate management contributes to regional revitalization. The bank has set up a team of roughly 100 consultants at its head office, who cooperate with branches to provide services to customers. Its consultant team as of FY03/20 was larger than the teams at Hokuriku Bank (84) and Fukui Bank (48).

Consultation services provided

Business consultation Description of consulting services 1 Management strategy ▶Formulation of management philosophy, basic policy, and action guidelines ▶Formulation of management plan ▶Proposal of policies for each client ▶Business Process Re-engineering (BPR) standards, proposals (optimization of business processes) ▶Optimization of office work by using cloud-based 2 Business optimization accounting software ▶Creation of manuals for various work processes Business succession and ▶Formulation of business succession plans ▶Design of holding and spin-off companies ▶Development of internal systems to prepare for management 3 capital strategy succession 4 Management enhancement ▶Formulation of management plans ▶Support for reform of organizational culture ▶Cost management 5 M&A ▶Coordination of sale of company and M&A ▶Support related to negotiations and contract creation, etc. ▶Advice regarding calculation of enterprise value 6 ICT ▶Introduction of effective groupware ▶Support for paperless operations ▶Introduction of various systems 7 Business matching ▶Referrals to new customers and suppliers ▶Referrals to development partners for new products and technologies ▶Referrals to subcontractors 8 Real estate ▶Provision of real estate information (sales and rental operations) ▶Advice regarding effective utilization of real estate ▶Referrals to real estate brokers 9 HR development ▶Implementation of various forms of training ▶Training of managers ▶Improvement of organizational capabilities 10 HR systems ▶Analysis of existing personnel, and development of ideal employee profile ▶Formulation of personnel evaluation system ▶Design of wage schemes 11 Staff recruitment ▶Optimal HR matching ▶Proprietary HR information network ▶Support for employee retention 12 Retirement benefit systems ▶Design of overall system ▶Introduction of defined contribution pension plans ▶Support for retirement benefit accounting 13 Overseas operations ▶Cultivation of overseas sales channels ▶Support for establishment of overseas bases ▶Advice regarding trading procedures 14 Startup businesses ▶Formulation of business plan ▶Fund raising ▶Resolution of various problems (selection of suppliers, etc.) ▶Formulation of profitability improvement plans for medical and long-term care businesses ▶Support related to establishment of clinics and long-term care 15 Medical and long-term care facilities ▶Incorporation and business succession for medical centers 16 Subsidies ▶Provision of various subsidies and grants ▶Support for preparation of business plan ▶Cooperation with various support institutions

Source: Shared Research based on bank data Note: The bank also has experience in the formulation of business continuity plans and in sales branch consulting operations.

Establishing a consulting company

The bank intends to shift to a holding company structure through a simple transfer of shares, effective October 1, 2021, with the bank becoming a wholly owned subsidiary. After the establishment of the holding company, all subsidiaries and subsidiary corporations (excluding two non-consolidated subsidiaries) will be reorganized as companies directly held by the holding company, using methods such as paying distribution-in-kind to the holding company for all shares held by Hokkoku Bank.

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 35 Prior to shifting to a holding company structure, the bank is developing its consulting department into a corporate organization (CC Innovation Co., Ltd.) with the aim of providing to its customers a wide range of consulting services. In the past, its consulting services were limited mainly to small and medium-sized companies. However, the bank aims to broaden its focus to include listed companies, large corporations, net depositors, non-main borrowers, SMEs, and small-scale business operators.

Consultation services for ICT adoption

Hokkoku Bank aims to support the use of ICT by regional customers, thereby enhancing the labor productivity of such customers and, by extension, the region as whole. Drawing on its experience with systems-driven business model reforms, it seeks to share its expertise and introduce third-party vendors. The bank also provides support for groupware adoption and helps organize workshops that provide information about ICT investment to customers.

Consultation services for business efficiency

The bank provides consultation services to resolve a variety of challenges faced by companies such as streamlining of office work, the transition to paperless operations, and visualizing operations. It helps resolve problems by leveraging its expertise in banking and its experience in streamlining office work. It provides support for streamlining office work by leveraging IT tools such as groupware and cloud-based accounting software.

For example, in 2015, Hokkoku Bank entered into a business alliance with fintech company freee KK (TSE Mothers: 4478), under which it introduces the cloud-based accounting software “freee” (sold online by freee) to its customers to help streamline accounting work. Using the freee software, customer companies can move away from paper-based processing to fully digital processing. The accounting software also integrates with customers’ bank accounts, allowing companies to share their financial information with Hokkoku Bank over the cloud, thus shortening screening processes at the bank. It therefore expects to achieve a deeper trust relationship with its customers.

Consultation services for management improvement

Hokkoku Bank offers support to companies in need of management improvements to promote not only short-term but also medium- to long-term growth. Rather than focusing exclusively on historical financial results, the bank looks at future prospects of companies, including their business model and scope for improvement.

Consultation services for overseas operations

The bank supports overseas expansion of its customers by leveraging its networks in Southeast Asia through its Singapore branch. It launched the Singapore branch (starting from an existing representative office, converted into a full-fledged branch later; the first Singapore branch of Japanese regional banks) ahead of its competitors. The branch has 15 staff members (seven Japanese employees and eight local staff) with 15 staff members supporting from the head office in Japan. A key focus area for the Singapore branch is helping customers cultivate sales channels. It also contributes to customer product development by facilitating overseas business negotiations, conducting market research based on each consulting agreement, and researching the needs of local buyers. The bank’s efforts to beef up consultation services have also contributed to growth in foreign exchange transactions.

Profitability of consultation services

Hokkoku Bank receives consultation fees from customers for its consultation services. Fees are calculated based on the hourly rate of the responsible consultant(s). Shared Research understands the bank aims to expand ancillary businesses and improve earnings as part of its comprehensive financial services through securing loans or other financing, rather than simply aiming to generate fee income.

Consultation contracts and income

The number of consultation contracts has increased about 6x from 110 in FY03/16 to 603 in FY03/21. Over the same period, consultation income has increased about 6x from JPY110mn to JPY611mn in FY03/21.

Example of consultation project: Improving productivity in Yamanaka lacquerware production region

The following is an example of a consultation project Hokkoku Bank has worked on. The bank aimed to enhance productivity in the production region of Yamanaka lacquerware. The project was recognized as an excellent initiative, winning the

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 36 Minister’s Award in the “Distinguished Initiatives by Financial Institutions that Contribute to Regional Revitalization” category —certified by the Secretariat of the Council on Overcoming Population Decline and Vitalizing Local Economy of the Cabinet —in May 2019.

Issues

Yamanaka lacquerware is traditional Japanese lacquerware produced by craftsmen in the city of Kaga, Ishikawa Prefecture. The city of Kaga has been a manufacturing region of Yamanaka lacquerware for about 450 years, and constitutes the largest lacquerware market in Japan with a production value of JPY10.0bn. In recent years, the number of Yamanaka lacquerware workshops has fallen by 60% from its peak mainly due to aging of the craftsmen, and the decline in the number of craftsmen had bottlenecked the production process. The production process for Yamanaka lacquerware has several stages, starting with the placement of orders by lacquerware shops (wholesaler) based on product planning and sales. Materials shops subsequently supply processed (molded) wood and plastic materials to craftsmen who consecutively apply the lacquering, and different craftsmen apply the sprinkling of gold or silver powder (referred to as maki-e in Japanese). Yamanaka lacquerware products need to pass through the hands of several craftsmen before they are delivered to lacquerware shops, therefore lacquerware shops could not grasp progress for each stage after placing orders. Also, the ordering process has traditionally relied on telephone and fax communication, which has resulted in some order errors.

Establishment of Yamanaka Lacquerware Consortium

The Hokuriku area is home to many traditional industries, and the lacquerware industry is a key customer industry for Hokkoku Bank. It has set up a Yamanaka Lacquerware Consortium comprising 36 Yamanaka lacquerware-related companies that were customers of the bank. The aggregate output of the consortium members accounts for roughly 60% of all shipments from the production region. Hokkoku Bank offers new services to enhance productivity in the production region as a whole, which could result in maintaining and expanding businesses with such customer companies.

To resolve issues in the area and industry, Hokkoku Bank considers the problems of individual companies as regional or industry-wide issues. It works to resolve problems for the region as a whole to ensure future succession of traditional industries. If collaboration between public and private sectors is needed to expand regional resolutions to the Hokuriku area or entire nation, the bank emphasizes playing a coordinating role between the parties.

Solutions

The bank aimed to unify management of the production process of Yamanaka lacquerware using a cloud-based process management system, under which purchase orders from lacquerware shops are shared with the entire supply chain (including materials suppliers and craftsmen), allowing each party to check manufacturing progress online. The sharing of information over the cloud has led to benefits to both lacquerware shops (such as visualization of the process, sharing of inventory information, and centralized order data) and the craftsmen (such as centralized order receiving and placing, and simplified invoice payments).

Hokkoku Bank enlisted cooperation from the national and local governments and arranged for half of over JPY17mn in project costs to be covered by subsidies. The system development was outsourced to a local IT company in the city of Kanazawa (Ishikawa Prefecture). The consortium members pay monthly system usage fees to the local IT company.

Effects

Initial data for the project pointed to a 10–30% increase in efficiency for business processing.

Project effects and outcome

Results Craftsman in the lacquerware process Type of work Hours reduced Degree of reduction Monthly working hours: Before Monthly working hours: After Payment Approx. 30% 30 20 -10 Lacquerware manufacturer Ordering Approx. 30% 100 70 -30 Billing Approx. 10% 80 70 -10 Wooden base maker Order-taking Approx. 10% 150 135 -15 Coating craftsman Billing Approx. 10% 3 2.5 -0.5 Gold lacquer painter Billing Approx. 10% 3 2.5 -0.5

Source: Shared Research based on bank data

Implications

To improve the productivity of regional SMEs, Hokkoku Bank thinks it needs to (1) establish relationships with customers that allow face-to-face discussions, (2) visualize processes done by manpower and automate them through adoption of IT systems,

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 37 and (3) provide support to customers for overall progress management of the project through close involvement. Bank cards business Background and purpose of Bank cards business

Hokkoku Bank started offering Visa debit card services in 2016 with the aim of enhancing productivity of local companies and improving convenience for consumers through cashless payment solutions. It decided to promote such solutions, leveraging its experience of the “Double Productivity Initiative” launched in 2009, based on the rationale that improved productivity and profitability of local companies would confer merits to banks as well. The bank also thought worker shortages in the region will intensify once the extension of the Hokuriku Shinkansen route drives up the volume of domestic and inbound tourists. Against this backdrop, it thought that further adoption of cashless payment solutions in the region and the resulting reductions in time and personnel required to handle cash transactions will not only expand benefits from inbound tourism but also help offset worker shortages.

When it launched its debit cards, the bank paid careful attention to aspects such as versatility (broad acceptance), immediacy (immediate settlement), and security. Given the increase in payment terminals compliant with international payment standards in anticipation of demand growth from inbound tourists, the bank opted for debit cards of the international Visa brand.

Debit cards

The main difference between credit and debit cards lies in the timing of settlements. When using credit cards, cardholders borrow funds against a credit line and repay these at a later point in time. When using debit cards, the funds are immediately withdrawn from their account. Other distinct features of debit cards are that they can only be issued by a bank that offers deposit accounts, that they can only be used to pay up to the amounts cardholders have in their bank accounts, that applications are in principle not subject to screening, and that they tend to earn fewer reward points than credit cards.

Differences between credit and debit cards

Comparison items Credit cards Debit cards Payment method Deferred payments (can borrow from credit line) Immediate payments (no credit line) Screening Screening applies (in principle) No screening (in principle) Age restrictions 18 or above Generally 15-16 or above Withdrawal account Can be selected by cardholder (with some exceptions) Automatic withdrawal from account held at issuing bank Annual fees Range from free to over JPY100,000 Generally range from free to several thousand yen Issuance fee None (in principle) None (in principle) Sign-up fees None (in principle) None (in principle) Spending limit Depends on card, ranging from roughly JPY100,000 to over JPY10mn No limit per se as long as spending does not exceed bank account balance One-time payment, two installments, multiple installments, revolving payments, Payment method One-time payment only bonus payments, etc. Reward points Reward point return rate: average of 0.5％ Reward point return rate: average of 0.3％ Benefits Wide range of benefits such as access to airport lounges, discounts, etc. As a general rule, reward points only Relatively easy to obtain high insurance coverage amounts with many cards Ancillary insurance Differs widely by card (particularly gold cards) Can be used at affiliated merchants (convenience stores, chain restaurants, hotels, Can be used at affiliated merchants (convenience stores, chain restaurants, hotels, Usage in Japan etc.) etc.) Usage overseas Can be used at affiliated merchants Can be used at affiliated merchants Impact on credit Usage builds credit history Usage does not build credit history history Advantages/ Loss of card can lead to third parties getting a hold of PIN code, resulting in Healthy card usage can have a favorable effect on loan screenings. disadvantages unauthorized withdrawals

Source: Shared Research based on bank data

Licensed Visa acquirer

In February 2016, Hokkoku Bank obtained a license as a Visa acquirer (first among Japanese banks), and it subsequently started rolling out payment terminals to affiliated merchants. This marked the first time a regional financial institution acted in the capacity of acquirer. While debit card issuer functions were confined to banks that operated debit accounts for customers, acquirer functions had up to that point been the territory of credit card and other companies.

As an acquirer, Hokkoku Bank can receive fees from affiliated merchants. By performing double duty as a card issuer and acquirer, it is able to utilize its own settlement system to reduce fees for affiliated merchants, thus undercutting other credit and debit card companies and offering new low-cost earnings opportunities to affiliated merchants. Hokkoku Bank started offering Visa debit cards in the Hokuriku area from April 2016.

According to METI’s guidelines for Cashless Vision, affiliated merchants are typically charged a fee of 3.24% (combination of card issuer and acquirer fees), of which 2.3% goes to the issuer. Hokkoku Bank, on the other hand, charges its affiliated merchants a more affordable 2.98% (at most), giving it a competitive edge over credit card companies.

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 38 Traditional credit card income structure

Source: Shared Research based on Cashless Vision by METI, April 2018 Notes: The conceptual diagram above illustrates the income flow for credit card operations. However, the same model applies to debit card operations. International credit card brands: Visa, Master, JCB. AMEX, Diners Club Acquirer: Typically a credit card company that enters into agreements with merchants (acquires merchants, screens merchants, and serves as payment intermediary). Card issuer: A company that issues credit cards (issues the cards, manages cardholders, bills cardholders for usage, and monitors card usage). In the case of debit cards, the card issuer must be a depository institution.

Track record in Bank cards business

As of end-March 2021, Hokkoku Bank had issued 239,000 debit cards and signed up 6,592 affiliated merchants (and supplied the same number of payment terminals).

Bank cards business data

FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 Total number of debit cards issued ('000) 58 109 154 206 239 Total number of affiliated stores with debit card 1,753 2,751 4,078 6,114 6,592 terminal

Source: Shared Research based on bank data

Card eligibility

To cater to a wider customer demographic than credit cards, Hokkoku Bank accepts applications for debit cards from customers aged 15 and above. There is no spending limit per se but charges must remain within the scope of the balance of deposit of the cardholder. No screening is required as part of the application, and charges are automatically withdrawn from cardholder deposit accounts when they present their card for payment.

Reward points and value-added services

Hokkoku Bank has launched an email service that notifies cardholders of card usage. It also has developed and provided the Hokkoku Wallet (Hokkoku Saifu) smartphone app, which allows cardholders to check their reward point balances and card usage details, and search for affiliated merchants. To contribute to regional revitalization, Hokkoku Bank has developed a system under which cardholders can spend accumulated reward points at local affiliated merchants. The bank says its debit cards have gained traction even in remote areas and among seniors, which are the areas and demographic it had been expected would be resistant to cashless payments. The cards are contactless and simply need to be tapped against a terminal to make a payment. Concerns over the COVID-19 pandemic coupled with the ease of use for seniors make the cards appealing.

Collaboration with e-commerce mall COREZO

In May 2019, Hokkoku Bank launched the e-commerce mall COREZO, which is operated by its subsidiary Hokkoku Management (acquired license pursuant to provisions in Article 16-2-9 of the Banking Act). With large e-commerce site

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 39 operators entering into the banking industry, Hokkoku Bank launched the e-commerce mall as a platform for regional revitalization, leveraging its unique characteristics and perspectives as a bank that is rooted in local communities.

COREZO is an e-commerce mall through which various business operators can directly sell locally manufactured products such as sake, confectionary, and craft products to consumers. It opens up new sales channels for the bank’s customers, particularly SMEs. Hokkoku Bank continues to sign up new stores for the platform. Companies who open a store on the mall can choose from two payment plans: fixed and variable rate. Under the fixed-rate plan, stores pay a monthly fee of JPY12,000 per store. Under the variable-rate plan, they pay a monthly fee equivalent to 3.0­–5.0% of their monthly sales. By undercutting major e-commerce site operators, which charge fees commensurate with sales, the bank aims to reduce the financial burden for companies that set up a store. The reward points accumulated on debit cards issued by the bank can be used for purchases on COREZO with an exchange rate of JPY1 per reward point. Leasing business Leasing business by bank following revision of Bank Act

Japanese banks were barred from engaging in leasing transactions until 2011, when the ban on such operations was lifted with a revision of the Bank Act. Prior to the changes, Hokkoku Bank’s consolidated subsidiary Hokkoku General Leasing undertook leasing operations. Hokkoku Bank had focused on lending operations and referred leasing inquiries from customers to its subsidiary. Because its lending and leasing operations were conducted by separate sales teams, it was unable to fully leverage the bank’s customer base and information networks to secure competitive advantages. As major leasing companies with extensive capital resources entered into the Hokuriku area, Hokkoku General Leasing started lagging such rivals in cost competitiveness due to differences in total cost of funding.

Finance leases: A lease transaction under which a leasing company (lessor) purchases an asset selected by a user (lessee). This type of lease transaction cannot be cancelled and requires the lessee to pay nearly the entire purchase price of the asset and related expenses through a series of lease payments. Unlike ordinary rental agreements where the lessee selects an asset that is already owned by the lessor, the lessor purchases a new asset selected by the lessee, grants the lessee operating control of the asset during the term of the lease, and recovers the total cost of the asset, including the purchase cost, capital cost, fixed asset taxes, and insurance premiums through lease payments over the lease period. A wide range of assets can be purchased under finance leases, such as computers and telecommunications equipment, office equipment, machine tools, and industrial machinery. Finance lease transactions can also be categorized into two groups based on whether or not they transfer ownership to the user after the lease period expires.

Differences with operating leases: In operating lease transactions, users pay lease fees throughout the lease period, and return the leased asset to the leasing company once the lease period expires. A key difference between operating and finance leases is that the total value of lease payments is lower than the total value of the asset in operating leases, but higher in finance leases. In addition, lease periods can be flexibly set in operating leases, but are required to be at least 60–70% of the statutory useful life of the asset in finance leases.

Overhaul of lease sales structure

Following the lifting of the ban on engagement in leasing operations by banks, Hokkoku Bank rebuilt its group-wide sales structure for leasing operations. It established a team of 300 sales staff across the group, the largest such team in the Hokuriku area, and clarified the responsibilities of Hokkoku Bank and Hokkoku General Leasing. The bank has consolidated relevant sales counters at Hokkoku Bank, and collaborates with Hokkoku General Leasing for finance leases with a transfer of ownership and operating leases, which it cannot handle directly. Under the new structure, Hokkoku Bank became capable of leveraging its sales force to meet the capital investment needs of its customers, which include purchases of commercial vehicles, heavy machinery, kitchen equipment, copiers, hair salon equipment, and computers.

Optimal mix of lending and leasing services

By expanding its range of lease products, the bank has broadened its tool set to resolve customer problems, and this has led to new orders and inquiries. For example, the bank could previously only offer loan proposals to medical companies in need of funds for capex. By adding leasing solutions to its portfolio, the bank now can propose lease solutions to them for medical

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 40 equipment and therefore has been able to capture projects without getting embroiled in interest rate competition. Customer companies can easily compare the terms of loans and leases, and have access to sales staff with extensive knowledge of leasing through the close collaboration between Hokkoku Bank and Hokkoku General Leasing. By proposing an optimal mix of lending and leasing services, the bank can obtain detailed information on customer companies’ capital investments and spending plans. This in turn allows Hokkoku Bank to lock in customers by providing additional consulting services targeted at core businesses of customer companies.

Track record and medium-term plan

Hokkoku Bank’s non-consolidated income from the Leasing business has steadily increased from JPY203mn in FY03/18 to JPY275mn in FY03/19, JPY332mn in FY03/20, and JPY360mn in FY03/21. On the other hand, affiliate Hokkoku General Leasing posted leasing revenue of JPY1.8bn in FY03/2021. Lease rate competition with major leasing companies is intensifying. The bank’s medium- to long-term business strategy calls for Hokkoku Bank and Hokkoku General Leasing income from the Leasing business of JPY1.9bn in FY03/26.

Lease assets

Lease investment assets (group total) FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 (JPYmn) Hokkoku Bank 1,100 4,300 8,400 9,500 10,000 9,700 Hokkoku General Leasing 19,200 20,800 21,200 23,800 26,500 26,100

Source: Shared Research based on bank data Retail banking services for individual customers

Services for individuals: Hokkoku Life+ (Hokkoku Life Plus)

As part of the medium- to long-term business strategy, the bank is revising its allocation of sales resources from the traditional focus on over-the-counter operations to “non-face-to-face digital marketing operations and face-to-face work area sales.” With the new digital account service Hokkoku Life + (Hokkoku Life Plus) at its core, the bank plans to build a support-based sales system that uses digital contact points to communicate with its customers.

Hokkoku Life + (Hokkoku Life Plus) The bank launched the service in February 2021, offering a digital ordinary savings account that includes a VISA debit card and cloud banking with no passbook or seal required. The VISA debit card can be used for instant payments and in the accumulation of loyalty points. Moreover, the use of cloud banking allows customers to use their smartphones to check on their balances. There is also no charge for transferring funds to other banks via cloud banking, and customers can use a cloud-based app for easy family budgeting. The general idea is to improve the ease of money management for individual customers by digitizing accounts and making them cashless, while also allowing customers to transfer money to other banks and use convenience store ATMs free of charge no matter the location. For the bank, this will allow it to go completely paperless in its transactions while establishing and maintaining digital contact points with its customers. The bank plans to introduce a subscription service with improved services in spring 2022. By FY2024, the bank aims to have roughly 280,000 users.

Investment management

Hokkoku Bank recommends medium- to long-term investment products to individual customers. Focusing on core investment, it selects investment trusts based on these criteria: (1) clear investment policy of fund managers and regular reports, (2) flexible cash allocations to dynamically adapt to sudden changes in market prices, (3) flexible control of hedging to mitigate impacts of price fluctuations within funds rather than upfront decision on dynamic management of currency exposure.

In the past, financial institutions would prioritize securing fee income by urging purchasers of investment trusts to repeatedly sell the products they purchased and buy different products, and this ultimately became a matter of public concern. In response, financial institutions started selling theme-based investment trusts and held off on recommending other products until the themes of the original products became less popular. Hokkoku Bank selects investment trusts based on the aforementioned criteria and recommends medium- to long-term investment in products that keep risk down to a certain level. The investment trust holding period for the banks’ customers averaged 8.38 years (as of FY03/21), which is longer than the average of 5.3 years in FY03/20 for major banks and 3.6 years in FY03/20 for the 27 leading regional banks.

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 41 To its younger customer demographic, the bank recommends investment trusts with periodic investment, under which customers steadily allocate funds into an investment trust each month. These investment products typically start out with small investment amounts, making them more accessible to customers. They also employ dollar-cost averaging strategy to keep the number of investment units high when the price is low, and low when the price is high. In FY03/21, the bank had 29,240 customers investing in accumulation-type investment trusts (+15.4% YoY). The number of contracts for Hokkoku Omakase Navi (an accumulation-type product), which was launched in October 2019, was 3,964, up 139.7% YoY.

Of the total assets deposited at Hokkoku Bank, over 90% are individual deposits. Rather than aggressively pushing sales of investment trusts or insurance products, the bank strives to provide financial consulting with a view toward life planning for the customer.

Balance of deposit assets under Hokkoku account

Assets under Hokkoku account FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 (JPYmn) Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Personal deposits 2,061,376 2,093,361 2,124,961 2,162,086 2,199,999 2,247,498 2,324,776 2,401,959 2,478,127 2,662,691 YoY 1.6% 1.6% 1.5% 1.7% 1.8% 2.2% 3.4% 3.3% 3.2% 7.4% % of total 86.0% 85.5% 85.8% 86.3% 87.6% 88.4% 89.1% 89.9% 90.6% 91.0% Government bonds 95,214 87,494 67,223 47,525 36,121 32,528 28,347 22,270 26,471 28,009 YoY -4.4% -8.1% -23.2% -29.3% -24.0% -9.9% -12.9% -21.4% 18.9% 5.8% % of total 4.0% 3.6% 2.7% 1.9% 1.4% 1.3% 1.1% 0.8% 1.0% 1.0% Mutual funds 101,670 106,919 105,466 113,009 96,338 87,031 86,996 85,305 73,780 84,191 YoY -11.9% 5.2% -1.4% 7.2% -14.8% -9.7% 0.0% -1.9% -13.5% 14.1% % of total 4.2% 4.4% 4.3% 4.5% 3.8% 3.4% 3.3% 3.2% 2.7% 2.9% Insurance (over-the-counter; annuity insurance, 137,988 161,470 178,445 183,997 180,025 174,915 168,561 163,228 156,330 151,943 other) YoY 25.9% 17.0% 10.5% 3.1% -2.2% -2.8% -3.6% -3.2% -4.2% -2.8% % of total 5.8% 6.6% 7.2% 7.3% 7.2% 6.9% 6.5% 6.1% 5.7% 5.2% Total 2,396,248 2,449,244 2,476,095 2,506,617 2,512,483 2,541,972 2,608,680 2,672,762 2,734,708 2,926,834 Mutual funds (no. of contracts) 21,125 24,580 25,343 29,240 YoY 16.4% 3.1% 15.4% iⅮeCo (number of contracts) 5,203 8,335 10,674 11,824 YoY 60.2% 28.1% 10.8% Hokkoku Omakase Navi (no. of contracts) 1,654 3,964 YoY 139.7%

Source: Shared Research based on bank data Corporate revitalization fund Formation and management of public-private Ishikawa SME Revitalization Fund

The Hokkoku Bank group manages revitalization funds through its consolidated subsidiary Hokkoku Management. In 2010, it formed Ishikawa SME Revitalization Fund (hereinafter, the No. 1 fund), Hokuriku’s first public-private revitalization fund with a total investment amount of JPY3.0bn and an investment period of 10 years. The fund has invested in 13 companies (nine hot spring inns, two manufacturing companies, one Japanese restaurant, and one service provider), all of which have completed rehabilitation proceedings. In 2016, the bank formed Ishikawa SME No. 2 Revitalization Fund with an investment value of JPY2.0bn. The fund has invested in four companies, one of which has completed rehabilitation proceedings. It remains invested in the other three companies.

Ishikawa SME Revitalization Fund

Fund No. 1 Fund No. 2 Fund No. 3 Date May 31, 2010 May 31, 2016 April 30, 2020 established Max. investment JPY3.0bn JPY2.0bn JPY2.0bn Term 10 years 10 years 10 years Hot springs inns, manufacturers, traditional Hot springs inns, manufacturers, liquor Investees Japanese restaurants, electrical work Hot springs inns businesses, service providers providers Investment 13 companies (completed rehabilitation Four companies (of which one completed One company (completed rehabilitation results proceedings) rehabilitation proceedings) proceedings) Investment ■ Survival of core industries supporting regional economy ■ Ensured continued employment and employment opportunities for workers effect ■ Maintained relationships with business partners and subcontractors

Source: Shared Research based on bank data

In April 2020, the bank group reached its upper investment limit for Ishikawa SME No. 2 Revitalization Fund, and formed Ishikawa SME No. 3 Revitalization Fund with a total investment amount of JPY2.0bn, with 50% to be contributed by the Organization for Small & Medium Enterprises and Regional Innovation, and the remaining 50% by Hokkoku Bank, Notokyoei Shinkin Bank, Kanazawa Shinkin Bank, Tsurugi Shinkin Bank, Ishikawa Guarantee, and Hokkoku Management. All investees

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 42 are SMEs with profitable core businesses whose earnings have deteriorated as a result of excess debt. This means they can be revitalized through financial restructuring or business reforms. Although the Fund pursues medium- to long-term investments by, for example, buying monetary claims and investing in equities, it does not aim at liquidating investees to generate near-term profit or reselling purchased claims. Using a hands-on approach, the Fund is involved in the management of the investees and aims to revitalize them over an investment period of five years. After the revitalization has been completed, the investees raise funds such as loans from their lender banks and make repayments to the Fund.

The bank transfers corporate customers and their claims that are classified as companies in danger of bankruptcy and assets in danger of bankruptcy, respectively, to the Fund. Hokkoku Servicer, Ltd., a subsidiary of the bank, undertakes a role of servicing for de facto and legally bankrupt companies. However, not all companies in danger of bankruptcy are included in the Ishikawa SME No. 3 Revitalization Fund. As the Organization for Small & Medium Enterprises and Regional Innovation holds a 50% stake in the fund, companies must have a certain business scale to be considered. Looking at Hokkoku Bank’s corporate customers, the business scale of hot spring inns or similar business size is needed for the companies to be included in the Fund. The Fund also invests to revitalize customer companies of other Shinkin banks who invested in the Fund. In addition to companies in Ishikawa Prefecture, the Fund invests in companies in Toyama Prefecture and Fukui Prefecture. Hokkoku Bank has not factored income from its revitalization funds into its medium- to long-term business strategy and earnings forecasts.

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 43 Market and value chain Market size and trends in regional banking industry Market size and market share Hokkoku Bank had 1.49% share of regional bank assets (total assets: JPY342tn) as of end-March 2020

As of end-March 2021, 99 regional banks operated in Japan (62 regional banks and 37 second-tier regional banks), making up 35.1% (roughly JPY413tn) of the JPY1,177tn in total assets of Japanese major banks and regional banks. As of end-March 2020, Hokkoku Bank’s non-consolidated total assets stood at JPY5.1tn, putting it in 30th position among the 64 regional banks. It had a 1.49% share of the JPY342.0tn in total assets of the 64 regional banks (according to the Regional Banks Association of Japan).

Classification of depository institutions and total assets size

Category Description Total assets (JPYtn) Major banks (9) Globally active banks 764 City banks (4) MUFG, Sumitomo Mitsui, Mizuho, Resona 670 Trust banks, other (5) Sumitomo Mitsui Trust, Mitsubishi UFJ Trust, Mizuho Trust, Shinsei, Aozora 94 Regional banks (99) Headquartered in each prefecture, covering the prefecture as the main operational base 413 Regional banks (62) 342 Tier 2 regional banks (37) 71 Total banks 1,177 Shinkin banks (255) Cooperative type of financial institutions to provide mutual aid for regional prosperity 158 Credit unions (145) Cooperative type of financial institutions to provide mutual aid for regional prosperity 146 Japan Post bank 211 Norinchukin Bank 105

Source: Shared Research based on FSA, Japan Bankers Association, Regional Banks Association of Japan, Second Association of Regional Banks, National Association of Shinkin Banks, and National Central Society of Credit Cooperatives data. Notes: Major banks include the city banks below, the trust banks below, as well as the former long-term credit banks Shinsei Bank and Aozora Bank. City banks: Mizuho Bank, MUFG Bank, Sumitomo Mitsui Banking, and Resona Bank Trust banks: Mitsubishi UFJ Trust and Banking, Mizuho Trust & Banking, and Sumitomo Mitsui Trust Bank Former long-term credit banks: Shinsei Bank and Aozora Bank Regional banks: Financial institutions that are licensed under the Banking Act (similar to city banks in this respect). Second-tier regional banks are mostly former mutual banks that used to be licensed under the Mutual Loan and Savings Bank Act (abolished in 1992). These banks are now governed by the Banking Act. Total assets figures are as of FY03/20. Figures in parentheses are as of end-March 2021.

42.5% share of loans outstanding in Ishikawa Prefecture, 21.2% in three Hokuriku prefectures (as of end-March 2020)

Hokkoku Bank had a 21.2% (+0.1pp YoY) share of the JPY11.3tn in total loans outstanding at depository institutions in the three Hokuriku prefectures. According to the Hokuhoku Report Interim Mini Disclosure 2020 from Hokuhoku Financial Group, the loans outstanding share for that financial group in the three prefectures was 27.8%.

Loans outstanding in the three Hokuriku prefectures

Hokkoku Bank Hokuriku Bank Fukui Bank (JPYbn) Loans outstanding Balance Share Balance Share Balance Share Ishikawa 4,278.9 1,820.2 42.5% 739.5 17.3% 170.3 4.0% Toyama 4,344.6 462.2 10.6% 1,693.1 39.0% 78.6 1.8% Fukui 2,692.6 116.5 4.3% NA NA 1,061.9 39.4% Total 11,316.1 2,398.9 21.2% NA NA 1,310.8 11.6%

Source: Shared Research based on 2021 special issue of the monthly financial journal “Kinyu Map,” Hokkoku Bank IR materials, and the integrated report from Fukui Bank

Ishikawa Prefecture: As of end-March 2020, Hokkoku Bank had a 33.9% share (unchanged YoY) of the total outstanding of deposits and savings of JPY10.1tn (+JPY276.7bn YoY) in the prefecture, and a leading share of 42.5% of the JPY4.3tn (+JPY76.8bn YoY) in total loans outstanding in the prefecture. The second was Hokuriku Bank with a 17.3% (+0.3pp YoY)

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 44 share of loans outstanding. By bank category, regional banks had a 46.7% (-0.2pp YoY) share of outstanding of deposits and savings in the prefecture, Japan Post Bank 17.1% (+0.6pp YoY), shinkin banks 13.1% (-0.5pp YoY), agricultural cooperatives 12.9% (-0.1pp YoY), major banks 6.6% (+0.2pp YoY), labor banks 2.5% (-0.1pp YoY), credit unions 0.7% (unchanged YoY), and second-tier regional banks 0.3% (unchanged YoY). Figures are based on 2021 special issue of the monthly financial journal “Kinyu Map;” outstanding of deposits and loans data based on domestically licensed banks’ banking accounts; deposits include negotiable certificates of deposits [NCDs]).

Toyama Prefecture and Fukui Prefecture: Hokuriku Bank has the top 39.0% share of loans outstanding in Toyama Prefecture. Hokkoku Bank has JPY434.4bn in outstanding loans in the prefecture (10.5% share, +0.4pp YoY), exceeding the JPY258.7bn in outstanding loans of the Bank of Toyama, which operates out of the prefecture. Fukui Bank has the leading 39.4% (+0.7pp YoY) share of loans outstanding in Fukui Prefecture, where Hokkoku Bank has outstanding loans of JPY116.5bn (4.3%, +0.4pp YoY).

Share expansion: As of March 2020, Hokuriku Bank had the top share of loans outstanding in the three Hokuriku prefectures (27.33%, -0.06pp YoY), with Hokkoku Bank in second position (19.78%, +0.42pp YoY) and Fukui Bank in third position (15.77%, -0.16pp YoY), according to a survey by Tokyo Shoko Research. Among the top 10 financial institutions in the three Hokuriku prefectures, Hokkoku Bank is the only one that is expanding its share of loans outstanding (according to the Nikkei, August 17, 2020). Competitive landscape Cross-prefecture lending and branch network

Hokkoku Bank, Hokuriku Bank, and Fukui Bank provide loans across the three Hokuriku prefectures, and also operate branches in major metropolitan areas such as Tokyo, Osaka, and Aichi Prefecture. Hokkoku Bank intends to expand its presence in Toyama and Fukui Prefectures with its consultation services as a tool to gain access to potential customers), ultimately helping it to expand its share of loans outstanding. The bank has built a team of 100 consultants, compared with 84 at Hokuriku Bank (at end-March 2020) and 58 at Fukui Bank (as of September 2020).

Competition from the standpoint of branch network

Hokkoku Bank Hokuriku Bank Fukui Bank Toyama Bank FY03/21 FY03/21 FY03/20 FY03/21 Head office and branches in Japan Ishikawa 87 36 9 Toyama 11 93 4 39 Fukui 3 22 72 Tokyo 1 7 1 Shiga 2 Kyoto 1 Osaka 1 3 1 Aichi 1 3 1 Subtotal [1] 104 164 91 39 Branch in branch [2] 11 16 Other [3] 5 3 Total locations [1]-[2]+[3] 93 169 78 39 Overseas branches 1 Singapore 1 Total branches 94 169 78 39 Sub-branches in Japan 7 Ishikawa 1 Money Plaza (locations) 9 Overseas offices (locations) 3 9 Shanghai 1 1 Singapore 1 Bangkok 1 1 Hồ Chí Min 1 1 New York 1 Dalian 1 Shenyang 1 Vladivostok 1 Yuzhno-Sakhalinsk 1

Source: Shared research based on disclosure documents released by the banks. Note: In addition to the data above, Hokuriku Bank also has branches in Hokkaido, Kanagawa, Niigata, Nagano, Gifu, and Kyoto Prefectures, and representative offices in New York, London, and Dalian. Fukui Bank also operates a branch in Kyoto Prefecture. The numbers of Hokuriku Bank and Fukui Bank branches listed for the Kanazawa area are limited to those with a registered address in Kanazawa City.

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 45 Structural problems in the banking industry Pullback in financing needs

According to Flow of Fund Statistics released by the BOJ, the private nonfinancial corporations sector moved to financial surplus in 1999. The household and private nonfinancial corporations sectors are presently both maintaining financial surpluses. The move to financial surplus in the private nonfinancial corporations sector drove a sharp decline in interest rates on loans and there is little prospect of an upturn given the current environment.

Financial surplus/deficit in the private sector (households and nonfinancial corporations) and contract interest rates on new loans

Source: Shared Research based on BOJ materials Note: Financial surplus and deficit data based on Flow of Fund Statistics

Shrinking deposit-lending margins

The continued negative interest rate policy of the BOJ has led to a flattening of the yield curve, giving rise to an environment in which the traditional banking business model that generates income from the yield spread between long- and short-term interest rates no longer functions. Loan-to-deposit ratios continue to decline, and the widening gap between deposits and loans is tracking the decline in interest rates. Meanwhile, population declines in regional areas are eroding loans outstanding while a financial surplus at households is contributing to increases in outstanding of deposits. As long as these conditions persist, logic suggests interest rates on loans will have difficulty to turn higher.

Flattening JGB yield curve Relationship between loan-deposit gap and interest rates

Source: Shared Research based on Ministry of Finance (MOF) materials Source: Shared Research based on Ministry BOJ materials

Population decline limiting funding needs

Funding needs in regional economies is being affected by population declines and falling birthrates and aging population. The table below illustrates the relationship between the working-age population and loans outstanding by prefecture, showing a strong correlation between the two (except in Tokyo, Osaka, and Fukuoka). The number of households in the three Hokuriku prefectures is poised to decline further through 2040, based on regional population projections by the National Institute of Population and Social Security Research. Compared with 2015, the number of households in 2040 is expected to be down 7.1% to 363,000 in Toyama Prefecture, down 5.4% to 428,000 in Ishikawa Prefecture, down 5.6% to 263,000 in Fukui

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 46 Prefecture, and down 4.8% to 50.8mn nationwide. In other words, the population in the three Hokuriku prefectures is projected to contract at a faster pace than the national average.

Correlation between loans outstanding and working-age population

Source: Shared Research based Statistics Bureau (MIC) and BOJ materials

Household number projections for three Hokuriku Prefectures

Number of households ('000) Rate of change 2015 2015 2020 2025 2030 2035 Prefecture 2015 2020 2025 2030 2035 2040 ↓ ↓ ↓ ↓ ↓ ↓ 2040 2020 2025 2030 2035 2040 Nationwide 53,332 54,107 54,116 53,484 52,315 50,757 -4.8% 1.5 0.0 -1.2 -2.2 -3.0 Tokyo 6,691 6,922 7,054 7,107 7,097 7,019 4.9% 3.5 1.9 0.8 -0.1 -1.1 Toyama 390 392 389 383 373 363 -7.1% 0.3 -0.7 -1.7 -2.5 -2.8 Ishikawa 452 457 456 450 440 428 -5.4% 1.0 -0.2 -1.2 -2.3 -2.7 Fukui 279 280 279 275 270 263 -5.6% 0.3 -0.5 -1.2 -1.9 -2.5

Source: Shared Research based on 2019 Household Projections for Japan (by Prefecture) by National Institute of Population and Social Security

Economies of scale

The general and administrative expenses of regional financial institutions are strongly correlated with their loans outstanding, and banking business in general is conducive to economies of scale. For this reason, banks have a strong incentive to merge. (“Regional Finance-Related Issues and Future Directions to Create the Optimal Competition of Regional Corporations,” FSA, April 11, 2018) Capital Adequacy Ratio requirements (finalization of Basel III reforms) Implementation schedule for Basel III reforms

In July 1988, the Basel Committee on Banking Supervision (BCBS) published capital measurement and minimum capital requirement standards for internationally active banks (Basel I Accord). In June 2004, it refined risk weight functions against the backdrop of diversification and growing complexity in financial transactions and advances in risk management (Basel II Accord). From 2010, it focused on strengthening bank capital (qualitatively and quantitatively), introducing liquidity regulations, and reviewing disclosure standards. From December 2017, it started finalizing the Basel III reforms that are scheduled to be phased in from January 2022 and completed in 2027. However, in the wake of the COVID-19 outbreak, the BCBS on March 27, 2020, announced it would delay the application of the finalized Basel III by one year until January 2023.

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 47 Implementation schedule for Basel III reforms

Source: Shared Research based on BCBS, FSA, and Upper House materials

Basel III application in Japan

The key points of the finalized Basel III reforms are (1) revisions to standardized approach to credit risk, (2) revisions to the internal ratings-based framework to credit risk, (3) revisions to operational risk measurement framework, (4) the introduction of capital floor, and (5) revisions to leverage ratio requirements.

International versus domestic standard

Internationally active banks Domestically active banks Banks Mega banks (holding companies, banks, trust banks), Other banks, other regional banks, other tier 2 regional banks, other included major regional banks Shareholders' equity Capital (Tier 1 + Tier 2), Tier 1, Common Equity Tier 1 Core capital (common stock Tier 1 + more) Capital (Tier 1 + Tier 2): 8%, Tier 1: 6%, Common stock Minimum capital adequacy ratio Core capital: 4% (Common stock Tier 1: 4.5%, if internal models method is applied) Tier 1: 4.5% Capital buffer Capital conservation buffer: 2.5%, other None The first Minimum capital adequacy ratio + Total capital: 10.5%, Tier 1: 8.5%, Common stock Tier 1 pillar Core capital: 4% (Common stock Tier 1: 4.5%, if internal models method is applied) Capital buffer capital: 7.0% Leverage regulation Leverage ratio: 3% or higher None Liquidity coverage ratio and stable funding ratio: 100% Liquidity regulation None or higher The second Interest rate risk on the banking 15% or less of Tier 1 capital Will be 20% or less of core capital pillar book Range of disclosure Capital ratio, capital % of total, capital instrument Capital ratio and capital % of total (limited to core capital) The third Semiannually (with obligation to make efforts for quarterly disclosure); quarterly, if pillar Frequency of disclosure Quarterly internal models method is applied)

Source: Shared Research based on FSA materials Main competitors

Hokkoku Bank competes with major banks including megabanks, regional banks, second-tier regional banks, shinkin banks and credit unions, and Japan Post Bank in the three Hokuriku prefectures—Ishikawa, Toyama, and Fukui Prefectures. Among regional banks, its main rivals are Hokuriku Bank (Hokuhoku Financial Group [TSE1: 8377] affiliate) and the Bank of Toyama (TSE1: 8365), which operate out of Toyama Prefecture, and Fukui Bank (TSE1: 8362), which operates out of Fukui Prefecture. For reference, we include the earnings trends at these rival banks below.

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 48 Hokuriku Bank (Hokuhoku Financial Group [TSE1: 8377] affiliate)

Hokuriku Bank earnings (non-consolidated)

Income statement FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 (JPYmn) Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Ordinary income 105,460 103,086 97,797 94,047 93,387 92,995 91,139 90,239 88,528 86,427 Gross profit (A) 88,718 87,814 78,480 80,079 75,768 69,707 68,937 70,940 71,755 68,607 Core gross profit (A)-(B) 88,531 82,342 77,048 76,520 75,342 72,943 71,246 69,169 66,882 66,708 YoY 0.0% -7.0% -6.4% -0.7% -1.5% -3.2% -2.3% -2.9% -3.3% -0.3% Net interest income 73,590 69,993 66,314 64,068 63,474 62,803 61,156 58,207 55,298 55,773 Interest on loans and bills discounted 65,573 61,597 57,703 54,490 52,175 48,851 46,558 44,423 42,835 42,451 Interest and dividends on securities 14,349 13,318 12,304 12,327 13,827 17,033 18,106 16,391 14,257 13,369 Interest on deposits 5,922 4,314 3,222 2,508 2,093 1,308 1,047 923 739 436 Trust fees Net fees and commissions 11,689 10,623 9,123 10,571 10,625 9,029 9,108 9,954 10,564 10,126 Net trading income 516 152 309 230 166 71 45 52 136 50 Net other operating income 2,920 7,043 2,731 5,209 1,500 -2,197 -1,371 2,725 5,749 2,613 Net bond-related gains (losses) (B) 186 5,472 1,432 3,558 426 -3,236 -2,309 1,771 4,872 1,861 General and administrative expenses (C) 54,231 50,925 50,584 50,459 48,650 48,234 47,503 46,477 45,768 43,903 YoY 0.6% -6.1% -0.7% -0.2% -3.6% -0.9% -1.5% -2.2% -1.5% -4.1% Personnel expenses 26,560 25,939 25,638 25,244 24,926 24,551 24,082 23,578 22,673 21,863 Non-personnel expenses 24,943 22,638 22,624 22,493 20,790 20,174 19,904 19,628 19,762 18,685 Taxes 2,726 2,347 2,321 2,721 2,933 3,508 3,516 3,269 3,332 3,355 Net OP (before provision for general loan loss) (A)-(C) 34,486 36,888 27,895 29,620 27,118 21,472 21,434 24,462 25,987 24,703 Core operating profit (A)-(B)-(C) 34,300 31,416 26,463 26,061 26,692 24,708 23,743 22,692 21,114 22,804 YoY -1.1% -8.4% -15.8% -1.5% 2.4% -7.4% -3.9% -4.4% -7.0% 8.0% Core OP (ex. gains [losses] on trust cancellation) 21,153 19,943 21,513 Gains (losses) on trust cancellation Provision for ordinary loan loss [1] (D) -1,950 -2,681 0 -499 0 1 1,040 -558 2,189 1,730 Operating profit (A)-(C)-(D) 36,437 39,569 27,895 30,119 27,118 21,472 20,394 25,021 23,797 22,973 Nonrecurrent gains (losses) -8,958 -21,196 2,575 -5,592 -356 3,379 3,767 -2,847 -6,078 -2,457 Net stock-related gains -1,310 -6,758 183 139 -22 3,542 4,476 400 168 3,881 Gains on sale 83 137 200 166 2,349 4,340 4,606 2,361 3,189 6,256 Losses on sale 296 10 0 0 1,036 629 76 1,941 1,923 2,366 Write-off 1,097 6,885 16 25 1,335 168 53 19 1,098 8 Nonperforming loan disposal [2] (E) 6,409 12,065 -4,239 2,264 -1,109 -650 849 3,402 7,103 6,734 Provision for individual loan loss 5,224 11,168 0 1,850 0 -10 631 3,250 6,815 6,600 Provision for contingent losses 271 63 -473 -274 49 -319 -48 -149 -23 -208 Written-off loans 137 45 90 106 171 123 53 24 8 0 Loss on disposal of loan claims 764 49 212 32 7 4 61 52 61 32 Other loss on disposal of loan claims 0 574 0 -1,594 -9 241 241 309 (Loan-loss provision and expenses [1]+[2]) 4,459 9,384 -4,239 1,765 -1,109 -649 1,889 2,844 9,292 8,464 Reversal of provision for loan-loss [3] -4,644 Gain on recovery of written-off claims [4] Reversal of provision for ordinary loan loss [5] Other Ordinary profit 27,478 18,373 30,471 24,526 26,761 24,852 24,161 22,173 17,718 20,515 YoY 19.9% -33.1% 65.8% -19.5% 9.1% -7.1% -2.8% -8.2% -20.1% 15.8% Extraordinary income (losses) -2,461 -442 -2,096 -1,100 -857 -717 -1,898 -1,088 -897 -858 Gain (loss) on disposal of non-current assets -182 -81 -24 Impairment loss 361 2,071 Gain on recovery of written-off claims [4] Other extraordinary losses 182 Profit before income taxes 25,017 17,930 28,374 23,425 25,903 24,135 22,262 21,085 16,821 19,657 Income taxes 13,609 5,615 10,540 8,745 9,400 5,403 6,490 5,494 5,582 5,359 Income taxes–current Income taxes–deferred Profit 11,407 12,315 17,833 14,680 16,503 18,732 15,772 15,590 11,238 14,297 YoY 0 0 0 0 0 0 0 0 0 0 Net NPL disposal ([1]+[2]-[3]-[4]-[5]) 4,458 9,384 -4,329 1,764 -1,109 -650 1,889 2,844 9,292 8,464 YoY -37.5% 110.5% - - - - - 50.6% 226.7% -8.9% Loans and bills discounted (BS year-end balance) 4,233,960 4,332,774 4,227,696 4,365,302 4,383,442 4,467,623 4,670,149 4,740,350 4,910,354 5,033,384 Credit cost ratio (bps: 0.1％＝10bps) 10.5 21.7 -10.2 4.0 -2.5 -1.5 4.0 6.0 18.9 16.8 Overhead 61.3% 61.8% 65.7% 65.9% 64.6% 66.1% 66.7% 67.2% 68.4% 65.8% ratio

Source: Shared Research based on “Analysis of Financial Statements of All Banks” by the Japanese Bankers Association, and Hokuriku Bank financial statements

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 49 Fukui Bank (TSE1: 8362)

Fukui Bank earnings

Income statement FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 (JPYmn) Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Gross profit (A) 32,796 31,819 30,447 31,971 27,061 25,024 25,018 24,434 25,317 25,330 Core gross profit (A)-(B) 32,731 31,397 29,563 28,807 26,928 25,801 25,388 24,088 24,674 26,771 YoY -0.2% -4.1% -5.8% -2.6% -6.5% -4.2% -1.6% -5.1% 2.4% 8.5% Net interest income 9,172 27,886 25,568 24,834 23,689 22,976 22,524 21,523 21,834 24,268 Interest on loans and bills 24,379 22,691 20,887 19,617 18,583 17,395 16,791 16,439 16,299 16,068 discounted Interest and dividends on securities 6,370 6,448 5,790 6,352 6,395 6,907 6,995 6,295 6,824 8,227 Interest on deposits 1,180 848 801 797 789 454 510 531 476 248 Short-term investments and interest -3,658 -1,399 expenses Trust fees Net fees and commissions 3,266 3,209 3,217 3,153 2,928 2,471 2,355 2,501 2,770 2,438 Net trading income 0 0 0 0 0 0 0 0 0 0 Net other operating income 356 720 1,660 3,982 441 -424 136 408 710 -1,376 Net bond-related gains (losses) (B) 65 421 884 3,164 134 -777 -369 344 642 -1,440 General and administrative expenses (C) 20,350 20,482 20,804 21,098 20,881 21,112 22,215 20,965 20,985 21,664 YoY 3.4% 0.6% 1.6% 1.4% -1.0% 1.1% 5.2% -5.6% 0.1% 3.2% Personnel expenses 10,165 10,198 10,675 10,913 10,932 10,912 10,965 10,972 10,870 10,854 Non-personnel expenses 9,346 9,379 9,298 9,182 8,925 9,045 9,864 8,854 8,984 9,122 Taxes 838 904 830 1,002 1,023 1,153 1,384 1,139 1,130 1,687 Net OP (before provision for general loan loss) 12,445 11,336 9,643 10,873 6,180 3,911 2,802 3,468 4,331 3,665 (A)-(C) Core operating profit (A)-(B)-(C) 12,381 10,914 8,758 7,708 6,046 4,688 3,173 3,122 3,689 5,106 YoY -5.7% -11.8% -19.8% -12.0% -21.6% -22.5% -32.3% -1.6% 18.2% 38.4% Core OP (ex. gains [losses] on trust cancellation) 3,009 3,378 2,737 Gains (losses) on trust cancellation 113 311 2,369 Provision for ordinary loan loss [1] (D) 0 9,302 223 0 0 -656 0 -145 -667 502 Operating profit (A)-(C)-(D) 12,445 2,034 9,420 10,873 6,180 4,567 2,802 3,613 4,998 3,163 Nonrecurrent gains (losses) -987 -15,197 3,373 -5,762 5,443 1,599 2,990 17 -2,452 -40 Net stock-related gains -2 -502 786 1,877 602 338 -672 56 -512 228 Gains on sale 83 180 892 1,994 2,075 1,107 993 637 255 857 Losses on sale 80 368 105 117 1,470 764 989 580 675 371 Write-off 6 314 0 0 1 4 675 0 0 0 Nonperforming loan disposal [2] (E) 4,006 16,370 1,211 10,230 523 1,833 439 1,588 3,315 1,312 Provision for individual loan loss 0 -2,329 491 0 0 1,293 0 555 2,706 674 Provision for contingent losses 252 215 147 101 112 118 44 96 106 50 Written-off loans 3,737 18,388 563 10,101 406 416 394 888 501 586 Loss on disposal of loan claims 15 95 9 28 4 5 1 46 0 2 (Loan-loss provision and expenses [1]+[2]) 4,006 25,672 1,434 10,230 523 1,177 439 1,443 2,648 1,814 Reversal of provision for loan-loss [3] 1,133 0 158 712 0 2,695 20 0 Gain on recovery of written-off claims [4] 1,181 1,011 2,968 1,226 2,881 2,112 681 826 608 272 Reversal of provision for ordinary loan loss 96 3 45 15 31 13 20 28 [5] Other 706 567 826 1,161 1,754 950 702 767 742 Ordinary profit 11,458 -13,162 12,793 5,110 11,623 6,167 5,792 3,630 2,546 3,122 YoY 24.4% - - -60.1% 127.5% -46.9% -6.1% -37.3% -29.9% 22.6% Extraordinary income (losses) -1,515 -1,633 -965 -107 -1,469 -5 -35 -54 -225 234 Gain (loss) on disposal of non-current -34 -62 -44 -24 -89 9 74 -25 -143 -20 assets Impairment loss 1,480 1,723 420 82 1,059 15 112 37 97 90 Gain on recovery of written-off claims [4] Profit before income taxes 9,943 -14,795 11,827 5,002 10,154 6,161 5,757 3,576 2,320 3,357 Income taxes 2,891 -4,239 4,983 2,880 3,002 1,029 1,769 751 467 1,330 Income taxes–current Income taxes–deferred Profit 7,051 -10,556 6,843 2,121 7,151 5,132 3,988 2,824 1,853 2,027 YoY 14.2% - - -69.0% 237.2% -28.2% -22.3% -29.2% -34.4% 9.4% Net NPL disposal ([1]+[2]-[3]-[4]-[5]) 1,690 24,563 -1,537 8,801 -3,086 -966 -2,951 596 2,040 1,514 YoY -53.0% ------242.3% -25.8% Loans and bills discounted (BS year-end 1,437,127 1,434,451 1,500,113 1,552,575 1,586,129 1,603,187 1,628,851 1,672,399 1,731,033 1,801,043 balance) Credit cost ratio (bps: 0.1％＝10bps) 11.8 171.2 -10.2 56.7 -19.5 -6.0 -18.1 3.6 11.8 8.4 Overhead 62.2% 65.2% 70.4% 73.2% 77.5% 81.8% 87.5% 87.0% 85.0% 80.9% ratio

Source: Shared Research based on “Analysis of Financial Statements of All Banks” by the Japanese Bankers Association, and Fukui Bank financial statements

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 50 Bank of Toyama (TSE1: 8365)

Bank of Toyama earnings

Income statement FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 (JPYmn) Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Gross profit (A) 6,523 7,187 6,728 6,743 6,710 6,163 5,853 6,200 6,587 5,679 Core gross profit (A)-(B) 6,623 6,683 6,747 6,743 6,710 6,163 6,063 6,233 6,587 6,033 YoY -0.5% 0.9% 1.0% -0.1% -0.5% -8.2% -1.6% 2.8% 5.7% -8.4% Net interest income 5,975 5,965 6,103 6,000 5,911 5,480 5,230 5,343 5,694 5,084 Interest on loans and bills discounted 4,843 4,662 4,411 4,088 3,826 3,437 3,268 3,235 3,191 3,303 Interest and dividends on securities 1,448 1,540 1,907 2,104 2,254 2,163 2,028 2,139 2,524 1,785 Interest on deposits 354 274 248 220 208 144 101 71 60 46 Short-term investments and interest expenses Trust fees Net fees and commissions 616 691 619 718 785 671 820 878 880 935 Net trading income 0 0 0 0 0 0 0 0 0 0 Net other operating income -70 529 4 21 12 10 -198 -22 9 -342 Net bond-related gains (losses) (B) -100 504 -19 0 0 0 -210 -33 0 -354 General and administrative expenses (C) 5,129 5,875 5,421 5,398 5,263 5,248 4,984 4,854 5,494 4,925 YoY Personnel expenses 2,778 2,783 2,704 2,632 2,616 2,570 2,536 2,476 2,425 2,325 Non-personnel expenses 2,114 2,786 2,504 2,529 2,359 2,389 2,146 2,086 2,439 2,298 Taxes 237 305 212 236 287 288 301 291 630 301 Net OP (before provision for general loan loss) (A)- 1,393 1,311 1,306 1,344 1,446 915 869 1,346 1,092 753 (C) Core operating profit (A)-(B)-(C) 1,493 807 1,326 1,344 1,446 915 1,079 1,379 1,092 1,108 YoY -0.5% -45.9% 64.3% 1.4% 7.6% -36.7% 17.9% 27.8% -20.8% 1.5% Core OP (ex. gains [losses] on trust cancellation) 1,150 584 755 Gains (losses) on trust cancellation 229 508 353 Provision for ordinary loan loss [1] (D) 0 185 342 13 43 0 0 0 0 100 Operating profit (A)-(C)-(D) 1,393 1,126 964 1,331 1,402 915 869 1,346 1,092 653 Nonrecurrent gains (losses) -414 -854 -248 -22 284 679 829 585 -56 301 Net stock-related gains -449 -43 1,202 287 785 353 669 486 -153 691 Gains on sale 0 129 1,203 287 786 386 817 545 2,970 924 Losses on sale 383 43 0 0 0 33 146 58 3,074 0 Write-off 65 129 1 0 0 0 1 0 49 232 Nonperforming loan disposal [2] (E) 100 813 1,563 503 690 37 2 1 16 459 Provision for individual loan loss 0 793 662 229 652 0 0 0 0 445 Provision for contingent losses Written-off loans 100 24 1 15 13 Loss on disposal of loan claims 0 12 0 92 0 13 2 (Loan-loss provision and expenses [1]+[2]-[4]) -97 998 1,905 516 733 -184 -19 -16 -12 559 Reversal of provision for loan-loss [3] 197 0 0 0 0 221 21 17 28 0 Gain on recovery of written-off claims [4] 27 37 73 44 59 93 58 45 51 47 Reversal of provision for ordinary loan loss [5] Other -88 -35 39 148 129 48 82 37 34 22 Ordinary profit 979 271 716 1,308 1,687 1,595 1,698 1,932 1,036 955 YoY 51.8% -72.3% 164.2% 82.7% 29.0% -5.5% 6.5% 13.8% -46.4% -7.8% Extraordinary income (losses) -7 -20 -6 -3 -11 -89 -2 -38 -110 3 Gain (loss) on disposal of non-current assets -6 -19 -6 -3 -11 0 -1 -10 -7 3 Impairment loss 0 -89 0 -28 -103 0 Gain on recovery of written-off claims [4] Profit before income taxes 972 251 710 1,305 1,675 1,505 1,696 1,893 925 958 Income taxes 223 -73 10 166 714 376 428 511 215 431 Income taxes–current 23 36 194 134 706 198 469 459 230 373 Income taxes–deferred 200 -109 -184 31 7 178 -41 52 -15 58 Profit 748 325 699 1,139 960 1,129 1,268 1,381 710 526 YoY 81.1% -56.6% 115.1% 62.9% -15.7% 17.6% 12.3% 8.9% -48.6% -25.9% Net NPL disposal ([1]+[2]-[3]-[4]-[5]) 1 16 459 YoY ------Loans and bills discounted (BS year-end balance) 276,819 282,053 274,062 275,185 281,817 284,337 301,585 318,692 332,616 363,900 Credit cost ratio (bps: 0.1％＝10bps) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.5 12.6 Overhead 77.4% 87.9% 80.3% 80.1% 78.4% 85.2% 82.2% 77.9% 83.4% 81.6% ratio

Source: Shared Research based on “Analysis of Financial Statements of All Banks” by the Japanese Bankers Association, and Bank of Toyama financial statements Strengths and weaknesses Strengths

Distinct measures to stay ahead of rivals through the early adoption of digital and cloud solutions to streamline operations: Japanese banks have seen an inevitable drop in core gross profit driven by shrinking deposit-lending margins amid the BOJ’s continued negative interest rate policy, declining funding needs due to a contraction in the working-age population, and a drop in the number of companies. Regional banks, which have a smaller business scale, have struggled to make headway on cost reduction because they cannot take advantage of economies of scale, unlike major banks and top-tier regional banks. However, Hokkoku Bank (ranked in 31st position among the 64 regional banks by total assets as of end-September 2020) has become the first Japanese bank to move its online banking systems to the cloud and adopt an open system for its backbone system. It plans to transition its core banking system to the cloud in 2021. By shifting to a cloud-based backbone system and integrating subsystems into an extended relationship management (xRM) system, the bank aims to significantly reduce system maintenance and upgrade costs, and gain tools to strengthen its sales capacity.

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 51 Only 3.3% of Japanese banks as of end-March 2019 had transitioned their core banking system to a public cloud service (as of 2018, BOJ materials), underscoring Hokkoku Bank’s first-mover advantage in the industry.

Growth in noninterest income driven by Consultation services: As interest income is unlikely to turn upward in the current environment, growth in core gross profit largely hinges on growth in noninterest income businesses. The bank generates noninterest income from three businesses: Consultation services, Bank cards, and Leasing (provided in collaboration with a consolidated subsidiary). Noninterest income made up 16.1% of core gross profit in FY03/20, exceeding the average of 13.8% for the 64 regional banks, as well as the 11.5% for rival Fukui Bank. While its competitors are also stepping up consultation services, Hokkoku Bank has gained an edge. Its consultation services on ICT and productivity enhancements, based on experiences of its own successful reforms, carry greater weight with customers. In its Bank cards business, Hokkoku Bank can leverage its position as a card issuer and acquirer to attract affiliated merchants with more affordable fees than competing banks that are merely licensed card issuers, and thus expand its earnings opportunities.

Successfully avoiding labor productivity decline by consistently enhancing productivity and strengthening noninterest income: Hokkoku Bank has leveraged IT systems to change the work styles and improve the productivity of its employees, resulting in a fundamental transformation of its organization and change in mindset among its employees. By moving IT systems development from outsourcing to in-house, the bank has managed to reduce costs and build a systems strategy that reinforces its sales capacity. The effects of the reforms have been apparent in the bank’s labor productivity. Its OHR has averaged 65.4% over the last 10 years, roughly on par with rival Hokuriku Bank. Although banking is an industry where economies of scale tend to be achieved more easily than other industries, Hokkoku Bank has maintained its OHR at the same level as rival Hokuriku Bank with its larger (1.6x) business scale. OHR is best reduced by improving labor productivity (OHR ≂ general and administrative expenses/core gross profit ≂ [general and administrative expenses/number of employees]/[core gross profit/number of employees] ≂ expenses per employee/labor productivity). In FY03/21, labor productivity came to JPY23.2mn at Hokkoku Bank (CAGR of -0.4% in last 10 years), compared to JPY28.1mn at Hokuriku Bank (CAGR of -1.0% in last 10 years) and JPY19.3mn at Fukui Bank (CAGR of -3.2% in last 10 years). In fact, Hokkoku Bank has managed to avert a decline in labor productivity by consistently implementing productivity improvement initiatives and by strengthening noninterest income businesses. Weaknesses

Vulnerability to structural decline in demand as the population contracts in its core market, the three Hokuriku prefectures: In 2016, the FSA published the report “Challenges and Competitive Conditions Facing Regional Banks,” in which it promoted bank mergers as a means of cost reduction necessary to compete with rivals as population declines drive a structural decline in regional funding demand. The report pointed out that banks operating out of Ishikawa Prefecture and neighboring Toyama and Fukui Prefectures could not escape a decline in profitability even if they effectively controlled those markets, due to the expected large declines in population in those prefectures. In fact, from 2015 to 2024, the number of households is projected to decline 7.1% in Toyama Prefecture, 5.4% in Ishikawa Prefecture, and 5.6% in Fukui Prefecture, versus 4.8% decline nationwide. Even though Hokkoku Bank establishes a competitive edge over its rivals through its business model reforms, it remains unclear whether it can counter the impact of population decline successfully. Put differently, the bank will likely struggle to survive independently in the future, without considering mergers and integration over the medium to long term.

Slow progress in enhancing credit risk management among internationally active banks: Because it operates an overseas branch in Singapore, Hokkoku Bank is regarded as an internationally active bank (17 of the 115 banks in Japan fall into this category, of which 10 are regional banks). In FY03/20, the bank’s capital adequacy ratio stood at 10.3%, putting it in last position among the 10 regional banks operating under the international standard. While the other nine banks employ the internal ratings-based approach to calculate credit risk, Hokkoku Bank uses the standardized approach, under which required capital is calculated based on risk weights designated by financial regulators. Banks that opt for the standardized approach are required to have higher capital than those that adopt the internal ratings-based approach. In the finalization of the Basel III reforms, the effectiveness of the internal ratings-based approach was called into question, and subsequent discussions have leaned toward imposing some restrictions on this model. There is therefore little incentive for Hokkoku Bank to switch approaches at this juncture. However, banks that have advanced risk management are not barred from using the internal ratings-based approach. From the standpoint of capital allocation efficiency, internationally active banks are expected to continue enhancing and refining risk management, and optimizing capital levels. Hokkoku Bank’s cost of credit rose from 12bp in FY03/19 to 37bp in FY03/20 (43bp in FY03/21). Consequently, its yield on loans adjusted for cost of credit declined from 94bp to 65bp over the same period, falling below the 89bp average for the 64 regional banks. While the yield on loans remains in decline, sharp increases in cost of credit will continue to have a major impact on earnings. Therefore, Hokkoku Bank needs to enhance its credit risk management not only to clear regulatory requirements, but also to prepare for risk, maintain optimal capital levels, and ensure effective capital allocation.

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 52 Lack of diversity in personnel recruiting: Hokkoku Bank looks to develop a new business model by pursuing a digital transformation (DX) strategy and a systems strategy for its Banking business. The bank believes the adoption of digital technologies is inevitable to meet the needs of its customers at an advanced level, and it sees human resources and digital solutions as the engines that will power its reforms. It has independently developed systems and reinforced its consultation services by relying on its own staff (mainly employees hired shortly after graduation from college), thus cultivating a spirit of self-reliance. We understand the bank hires few mid-career candidates, and that many of such hires leave the bank eventually. However, as customer needs continue to change rapidly in the cloud era, hiring human resources with highly specialized skills is becoming increasingly important. Although its organizational culture promotes diversity in human resources, Hokkoku Bank does not have a great track record of bringing in mid-career hires and its organization appears to lack openness. However, the bank will need to compete with major banks and fintech companies to secure professional human resources, not only in the Hokuriku area but also in major cities such as Tokyo, as well as abroad. If Hokkoku Bank fails to secure external talent or if it struggles to develop talent internally, it may be forced to switch back to the outsourcing of systems development, thus jeopardizing the sustainability of its operations.

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 53 Historical performance and financial statements Income statement (consolidated)

Income statement FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Consolidated gross profit 52,477 53,608 48,843 55,039 50,490 46,263 46,018 44,906 49,602 40,650 YoY -0.7% 2.2% -8.9% 12.7% -8.3% -8.4% -0.5% -2.4% 10.5% -18.0% Net interest income 42,595 41,021 40,163 41,024 41,018 38,586 39,323 35,674 34,983 34,339 Net fees and commissions 7,785 7,683 7,836 7,456 6,588 6,347 6,544 6,709 6,918 6,583 Net other operating income 2,096 4,904 843 6,558 2,883 1,329 150 2,522 7,700 -273 Operating expenses 32,888 32,233 31,782 32,281 30,284 31,373 30,901 30,579 31,499 31,261 Loan-loss provision and expenses 6,386 6,653 4,135 8,685 7,149 1,325 1,944 3,034 10,206 11,300 Provision for individual loan loss 3,002 7,542 2,420 3,803 6,991 -275 1,954 2,142 7,332 8,144 Provision for general loan losses -132 -2,033 -383 2,745 -228 992 -472 355 2,503 2,862 Written-off loans 3,487 998 1,727 949 6 16 8 28 34 22 Loss on disposal of loan claims, other 29 146 370 1,187 380 591 453 508 335 270 Gains (losses) on stocks -354 -1,958 798 2,853 2,867 422 1,636 1,379 3,973 13,253 Other 2,018 1,360 3,074 2,016 1,677 1,881 1,558 1,493 1,311 1,549 Ordinary profit 14,865 14,123 16,798 18,941 17,601 15,867 16,367 14,165 13,181 12,890 YoY 14.3% -5.0% 18.9% 12.8% -7.1% -9.9% 3.2% -13.5% -6.9% -2.2% Extraordinary income (losses) -341 -2,664 -1,312 -2,764 -770 -333 -628 -716 -1,154 -897 Profit before income taxes 14,524 11,458 15,486 16,177 16,830 15,534 15,738 13,449 12,027 11,993 Income taxes–current 4,386 4,780 4,154 2,749 5,647 2,791 4,390 4,374 5,735 6,052 Income taxes–deferred 3,278 -1,216 2,831 4,780 1,010 1,369 738 135 -1,222 -1,136 Profit attributable to non-controlling interests 544 899 644 657 603 522 445 355 204 324 Profit attributable to owners of parent 6,314 6,994 7,855 7,989 9,569 10,851 10,163 8,583 7,310 6,752 YoY -15.1% 10.8% 12.3% 1.7% 19.8% 13.4% -6.3% -15.5% -14.8% -7.6% Consolidated net business profit 20,907 24,802 18,464 20,903 21,195 15,406 17,053 15,216 16,508 7,477 YoY 14.7% 18.6% -25.6% 13.2% 1.4% -27.3% 10.7% -10.8% 8.5% -54.7%

Source: Shared Research based on bank data Note: Figures may differ from bank materials due to differences in rounding methods.

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 54 Income statement (non-consolidated)

Income statement FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 (JPYmn) Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Gross profit (A) 49,177 50,433 45,925 52,403 48,043 44,004 43,911 42,882 47,538 38,727 Core gross profit (A)-(B) 48,669 46,951 46,384 47,162 46,414 43,949 45,041 41,509 41,584 40,954 YoY 0.2% -3.5% -1.2% 1.7% -1.6% -5.3% 2.5% -7.8% 0.2% -1.5% Net interest income 42,405 40,845 40,011 40,887 40,881 38,457 39,197 35,556 34,876 34,259 Interest on loans and bills 35,175 33,042 31,489 30,335 29,671 28,153 26,620 26,302 26,288 25,091 discounted Interest and dividends on 10,779 9,882 9,746 11,807 12,486 11,838 14,969 13,263 10,326 9,204 securities Interest on deposits 2,861 1,934 988 826 762 583 413 350 310 223 Trust fees Net fees and commissions 5,902 5,772 6,114 5,957 5,186 5,071 5,332 5,603 5,937 5,736 Net other operating income 869 3,813 -201 5,557 1,975 475 -618 1,722 6,722 -1,269 Net bond-related gains (losses) 508 3,482 -459 5,240 1,628 55 -1,129 1,372 5,952 -2,226 (B) General and administrative expenses (C) 30,398 29,852 29,778 30,306 28,439 28,806 28,346 28,256 29,422 29,175 YoY -3.5% -1.8% -0.2% 1.8% -6.2% 1.3% -1.6% -0.3% 4.1% -0.8% Personnel expenses 16,321 15,762 15,524 14,748 14,445 14,284 14,441 14,372 14,261 13,958 Non-personnel expenses 12,620 12,568 12,629 13,376 12,131 12,702 11,958 12,004 13,062 12,975 Taxes 1,456 1,522 1,625 2,181 1,862 1,819 1,946 1,879 2,098 2,241 Net OP (before provision for general loan loss) 18,779 20,581 16,146 22,096 19,603 15,197 15,565 14,626 18,116 9,551 (A)-(C) Core operating profit (A)-(B)-(C) 18,270 17,098 16,606 16,856 17,974 15,142 16,694 13,253 12,162 11,778 YoY 7.1% -6.4% -2.9% 1.5% 6.6% -15.8% 10.2% -20.6% -8.2% -3.2% Core OP (ex. gains [losses] on trust 12,268 11,813 11,587 cancellation) Provision for ordinary loan loss [1] (D) -273 -1,735 -252 2,871 335 1,037 -469 203 2,674 3,060 Operating profit (A)-(C)-(D) 19,052 22,316 16,399 19,225 19,267 14,160 16,034 14,422 15,441 6,491 Nonrecurrent gains (losses) -5,602 -10,364 -1,611 -2,070 -2,628 -140 -1,293 -1,642 -3,464 4,792 Net stock-related gains -359 -1,988 806 2,841 2,841 378 1,636 1,309 3,975 13,239 Gains on sale 265 468 1,246 2,956 3,516 955 2,595 2,267 5,958 16,338 Losses on sale 307 2,055 395 51 80 543 943 949 1,302 2,776 Write-off 317 401 44 64 594 33 15 8 680 322 Nonperforming loan disposal [2] (E) 6,008 8,369 4,019 5,995 5,949 754 2,095 3,062 7,103 8,335 Provision for individual loan loss 2,551 7,326 1,953 3,867 5,566 153 1,638 2,540 6,756 8,048 Provision for contingent losses Written-off loans 3,457 964 1,716 944 3 11 4 13 11 16 Loss on disposal of loan claims 0 78 350 1,183 379 589 453 507 335 270 (Loan-loss provision and expenses [1]+ 5,735 6,634 3,767 8,866 6,284 1,791 1,626 3,265 9,777 11,395 [2]) Reversal of provision for loan-loss [3] Gain on recovery of written-off claims [4] 1,536 836 2,147 1,216 555 692 63 69 17 72 Reversal of provision for ordinary loan loss [5] Other Ordinary profit 13,450 11,951 14,787 17,155 16,638 14,020 14,741 12,780 11,977 11,283 YoY 22.7% -11.1% 23.7% 16.0% -3.0% -15.7% 5.1% -13.3% -6.3% -5.8% Extraordinary income (losses) -346 -2,664 -1,312 -2,764 -770 -333 -629 -710 -1,154 -897 Gain (loss) on disposal of non-current -149 -168 -50 -883 -369 -100 -183 -143 -204 -248 assets Impairment loss 196 2,496 1,261 1,881 401 232 316 566 949 650 Gain on recovery of written-off claims [4] Profit before income taxes 13,104 9,286 13,475 14,390 15,868 13,687 14,112 12,070 10,823 10,385 Income taxes 7,020 2,925 6,220 6,930 6,238 3,579 4,632 4,047 4,147 4,431 Income taxes–current 3,669 4,226 3,428 2,362 5,226 2,327 3,876 3,930 5,327 5,588 Income taxes–deferred 3,350 -1,300 2,791 4,567 1,011 1,251 756 116 -1,180 -1,156 Profit 6,083 6,361 7,254 7,459 9,629 10,107 9,479 8,023 6,676 5,954 YoY -12.4% 4.6% 14.0% 2.8% 29.1% 5.0% -6.2% -15.4% -16.8% -10.8% Net NPL disposal ([1]+[2]-[3]-[4]-[5]) 4,197 5,798 1,620 7,651 5,730 1,099 1,562 3,195 9,759 11,322 YoY 24.0% 38.1% -72.1% 372.3% -25.1% -80.8% 42.1% 104.5% 205.4% 16.0% Loans and bills discounted (BS year-end 2,274,730 2,331,905 2,358,615 2,363,132 2,335,593 2,324,495 2,412,919 2,582,965 2,617,944 2,633,905 balance) Credit cost ratio (bps: 0.1％＝10bps) 18.5 24.9 6.9 32.4 24.5 4.7 6.5 12.4 37.3 43.0 Overhead 62.5% 63.6% 64.2% 64.3% 61.3% 65.5% 62.9% 68.1% 70.8% 71.2% ratio

Source: Shared Research based on bank data Note: Figures may differ from bank materials due to differences in rounding methods. Note: Gains/losses on cancellation of investment trusts are recorded under net interest income. Note: Fee income in the Consultation services and Bank cards businesses is recorded under fees and commissions.

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 55 Balance sheet (consolidated)

Balance sheet FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. ASSETS Cash and due from banks 55,927 77,445 160,303 544,907 467,351 748,544 1,094,772 1,221,400 1,389,813 1,483,423 Call loans and bills bought 73,148 100,846 15,308 30,000 54,561 118,000 Bills bought 7,953 5,601 4,682 3,708 3,783 3,714 3,637 3,614 3,411 3,096 Trading account securities 322 182 437 833 157 156 167 90 111 105 Money held in trust 22,018 25,070 15,077 15,025 15,024 13,531 13,531 13,523 13,519 13,513 Securities 902,333 886,272 893,006 1,190,527 1,018,148 1,104,367 1,060,597 1,088,790 990,091 1,198,610 Loans and bills discounted 2,265,382 2,322,999 2,350,504 2,355,374 2,328,285 2,315,444 2,402,114 2,567,333 2,599,328 2,614,865 Foreign exchanges 57 53 82 3,553 11,044 11,323 11,963 9,508 13,106 10,778 Lease receivables and investment assets 21,588 21,495 22,812 21,672 21,741 25,160 29,602 33,335 36,532 35,846 Other assets 13,358 12,870 12,033 14,438 16,084 47,438 77,464 69,257 33,804 39,342 Property, plant and equipment 35,511 33,551 37,368 38,301 36,923 35,223 34,155 32,804 31,414 31,428 Intangible assets 3,036 3,834 7,589 8,970 8,866 8,315 9,385 10,097 11,122 12,108 Differed tax assets 8,268 5,780 3,198 212 202 168 166 2,666 197 Customers' liabilities for acceptances and 19,705 18,449 17,544 17,071 16,661 16,397 17,544 17,197 18,476 17,345 guarantees Allowance for loan losses -25,491 -29,465 -28,835 -34,594 -40,265 -39,456 -36,774 -37,893 -46,131 -54,148 Total assets 3,405,627 3,487,404 3,513,777 4,179,790 3,904,020 4,320,364 4,772,893 5,029,226 5,097,268 5,524,513 LIABILITIES Deposits 2,958,403 3,011,013 3,049,886 3,079,447 3,086,299 3,185,984 3,362,662 3,538,022 3,634,904 3,969,004 Negotiable certificates of deposits 138,354 140,699 112,083 62,867 89,817 108,046 76,821 63,914 65,062 69,707 Call money and bills sold 195 12,659 324,605 67,916 293,334 696,969 847,399 981,819 718,694 Payables under repurchase agreements 93,828 31,206 Payables under securities lending transactions 36,009 35,416 49,517 374,027 337,572 359,851 197,918 204,703 93,634 230,366 Borrowed money 7,281 27,555 7,665 7,585 6,865 5,519 3,977 2,398 1,033 136,346 Foreign exchanges 57 53 82 118 22 5 7 14 12 2 Bonds payable 20,000 Other liabilities 23,654 23,186 23,632 39,283 41,772 72,758 21,353 21,853 42,495 45,638 Provision for bonuses 833 807 787 801 805 814 806 796 789 773 Net defined benefit liability 12,830 13,480 17,058 16,054 15,239 14,586 14,796 13,040 Provision for directors' retirement benefits 67 55 53 50 56 55 26 31 28 31 Other allowance 571 630 644 666 654 538 915 977 1,107 989 Deferred tax liabilities 9,816 1,383 6,824 14,320 13,188 711 14,681 Deferred tax liabilities for land revaluation 4,192 3,354 2,952 2,237 2,113 1,819 1,724 1,630 1,499 1,473 Acceptances and guarantees 19,705 18,449 17,544 17,071 16,661 16,397 17,544 17,197 18,476 17,345 Total liabilities 3,195,850 3,268,911 3,290,339 3,932,060 3,669,000 4,068,006 4,504,115 4,758,010 4,856,502 5,238,244 NET ASSETS Capital stock 26,673 26,673 26,673 26,673 26,673 26,673 26,673 26,673 26,673 26,673 Capital surplus 11,289 11,289 11,289 11,289 11,366 12,745 12,854 12,854 13,053 13,053 Retained earnings 134,165 137,510 142,871 148,850 150,502 159,480 167,344 169,267 174,603 176,013 Treasury shares -253 -197 -215 -3,931 -188 -193 -5,138 -920 -4,064 -663 Shareholders' equity 171,875 175,276 180,620 182,882 188,353 198,706 201,734 207,876 210,266 215,077 Valuation difference on available-for-sale 26,081 31,783 34,030 55,742 39,436 46,953 60,762 56,553 24,954 63,560 securities Deferred gains or losses on hedges -487 -399 -277 -388 -181 -25 -2 -1 -16 -3 Revaluation reserve for land 5,775 4,243 3,514 2,879 3,260 2,589 2,371 2,189 1,980 2,272 Remeasurements of defined benefit plans -3,197 -2,915 -5,623 -4,580 -3,745 -3,287 -3,593 -2,443 Accumulated other comprehensive income 31,370 35,627 34,068 55,317 36,891 44,936 59,386 55,452 23,325 63,385 Share acquisition rights 144 185 215 232 262 326 Non-controlling interests 6,387 7,403 8,534 9,297 9,512 8,389 7,656 7,886 7,173 7,806 Total net assets 209,777 218,492 223,438 247,730 235,020 252,358 268,777 271,215 240,765 286,269 Total liabilities and net assets 3,405,627 3,487,404 3,513,777 4,179,790 3,904,020 4,320,364 4,772,893 5,029,226 5,097,268 5,524,513

Source: Shared Research based on bank data Note: Figures may differ from bank materials due to differences in rounding methods.

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 56 Balance sheet (non-consolidated)

Balance sheet FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. Non-cons. ASSETS Cash and due from banks 55,907 77,372 160,264 544,854 467,253 748,466 1,094,614 1,221,230 1,389,693 1,483,350 Call loans 73,148 100,846 15,308 30,000 54,561 118,000 Monetary claims bought 5,608 3,252 2,165 1,329 1,468 1,451 1,449 1,436 1,424 1,312 Trading account securities 322 182 437 833 157 156 167 90 111 105 Money held in trust 22,018 25,070 15,077 15,025 15,024 13,531 13,531 13,523 13,519 13,513 Securities 901,535 885,336 890,924 1,188,257 1,016,633 1,102,331 1,057,489 1,086,000 988,490 1,195,702 Government bonds 360,605 356,569 319,080 393,299 384,670 260,527 224,069 176,024 114,664 184,831 Local government bonds 234,564 210,131 200,222 195,989 132,901 164,130 178,922 260,275 313,547 322,592 Corporate bonds 173,480 170,389 190,870 186,202 184,269 225,959 220,408 215,890 233,808 193,932 Stocks 69,424 72,302 79,970 135,889 123,277 155,125 180,666 169,439 143,491 172,566 Loans and bills discounted 2,274,730 2,331,905 2,358,615 2,363,132 2,335,593 2,324,495 2,412,919 2,582,965 2,617,944 2,633,905 Foreign exchanges 2,562 2,469 2,743 3,553 11,044 11,323 11,963 9,508 13,106 10,778 Other assets 11,757 11,081 10,023 12,846 15,116 49,779 83,928 76,680 41,276 46,494 Property, plant and equipment 34,348 32,466 36,268 37,251 35,851 34,205 33,121 31,747 30,354 30,349 Intangible assets 2,926 3,765 7,628 9,018 8,920 8,364 9,427 10,021 11,014 12,182 Differed tax assets 7,558 5,248 1,415 911 Customers' liabilities for acceptances and 19,705 18,449 17,544 17,071 16,661 16,397 17,544 17,197 18,476 17,345 guarantees Allowance for loan losses -22,380 -26,849 -26,462 -32,614 -37,980 -37,580 -34,968 -36,085 -44,172 -52,559 Total assets 3,389,749 3,470,599 3,491,955 4,160,559 3,885,746 4,302,922 4,755,750 5,014,316 5,082,150 5,510,480 LIABILITIES Deposits 2,964,029 3,016,535 3,054,179 3,084,829 3,091,438 3,191,693 3,368,595 3,543,889 3,641,527 3,976,489 Negotiable certificates of deposits 143,884 148,099 120,383 70,367 97,217 115,146 83,671 70,664 71,162 75,557 Call money 195 12,659 324,605 67,916 293,334 696,969 847,399 981,819 718,694 Payables under repurchase agreements 93,828 31,206 Payables under securities lending transactions 36,009 35,416 49,517 374,027 337,572 359,851 197,918 204,703 93,634 230,366 Borrowed money 20,000 62 53 135,998 Foreign exchanges 57 53 82 118 22 5 7 14 12 2 Bonds payable 20,000 Borrowed money from trust 90 account 129 145 Other liabilities 13,687 12,480 12,131 29,797 32,850 64,955 12,995 14,874 35,077 38,931 Provision for bonuses 810 785 766 782 785 797 792 782 772 757 Provision for retirement benefits 6,607 7,376 7,757 9,070 8,875 9,382 9,786 9,791 9,560 9,452 Other allowance 330 426 454 487 509 415 804 882 1,002 908 Deferred tax liabilities 10,986 3,669 8,137 14,962 13,697 14,584 Deferred tax liabilities for land 4,192 3,354 2,952 2,237 2,113 1,819 1,724 1,630 revaluation 1,499 1,473 Acceptances and guarantees 19,705 18,449 17,544 17,071 16,661 16,397 17,544 17,197 18,476 17,345 Total liabilities 3,189,314 3,263,173 3,278,427 3,924,381 3,659,632 4,061,937 4,499,600 4,756,886 4,854,728 5,240,709 NET ASSETS Capital stock 26,673 26,673 26,673 26,673 26,673 26,673 26,673 26,673 26,673 26,673 Capital surplus 11,289 11,289 11,289 11,289 11,289 11,289 11,289 11,289 11,289 11,289 Retained earnings 131,367 134,079 138,839 144,288 146,001 154,235 161,415 162,778 167,480 168,092 Treasury shares -253 -197 -215 -3,931 -188 -193 -5,138 -920 -4,064 -663 Shareholders' equity 169,077 171,845 176,587 178,320 183,775 192,005 194,240 199,821 201,379 205,392 Valuation difference on available-for-sale 25,924 31,551 33,489 55,135 38,996 46,090 59,540 55,420 24,078 62,110 securities Deferred gains or losses on hedges -487 -399 -277 -388 -181 -25 -2 -1 -16 -3 Revaluation reserve for land 5,775 4,243 3,514 2,879 3,260 2,589 2,371 2,189 1,980 2,272 Valuation and translation adjustments 31,213 35,395 36,725 57,625 42,075 48,653 61,909 57,608 26,042 64,378 Share acquisition rights 144 185 215 232 262 326 Total net assets 200,434 207,426 213,527 236,178 226,113 240,984 256,150 257,429 227,422 269,771 Total liabilities and net assets 3,389,749 3,470,599 3,491,955 4,160,559 3,885,746 4,302,922 4,755,750 5,014,316 5,082,150 5,510,480

Source: Shared Research based on bank data Note: Figures may differ from bank materials due to differences in rounding methods.

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 57 Cash flow statement

Cash flow statement FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cash flows from operating activities (1) 14,973 -8,211 73,257 637,701 -218,579 324,491 290,627 140,604 110,694 191,877 Profit before income taxes 14,524 11,458 15,486 16,177 16,830 15,534 15,738 13,449 12,027 11,993 Depreciation 2,536 2,457 2,321 2,666 3,812 3,837 3,935 3,992 4,297 4,076 Impairment loss 196 2,496 1,261 1,881 401 232 316 566 949 650 Change in provision for loan loss -2,145 3,973 -630 5,759 5,670 -808 -2,682 1,119 8,238 8,016 Change in provision for loans outstanding -63,242 -57,623 -27,514 -4,879 27,071 12,833 -86,671 -165,219 -31,995 -15,536 Change in deposits 142,964 54,954 10,256 -19,654 33,801 117,914 145,452 162,453 98,030 338,745 Change in call loans -45,127 -25,345 86,456 16,283 -75 -29,930 -24,485 54,585 202 -117,685 Change in call money 711 20,469 -7,426 311,865 -257,408 224,071 402,093 148,850 134,420 -263,125 Change in foreign exchanges [assets] -300 92 -274 -810 -7,490 -279 -639 2,454 -3,597 2,328 Change in foreign exchanges [liabilities) 7 -3 29 35 -96 -16 2 6 -2 -9 Interest income -46,467 -43,317 -41,522 -42,555 -42,855 -40,565 -42,327 -40,229 -37,082 -34,882 Interest expenses 3,895 2,314 1,368 1,535 1,841 1,982 3,004 4,554 2,098 542 Gains (losses) on securities -154 -1,523 -339 -8,093 -4,496 -477 -506 -2,752 -9,928 -11,027 Change in borrowed money from trust 90 39 16 account Interest and dividends received 34,642 33,697 32,612 31,070 30,469 28,900 26,705 26,929 27,700 25,518 Interest paid -4,535 -5,087 -2,441 -1,655 -1,925 -1,960 -2,933 -4,681 -2,217 -599 Cash flows from investing activities -820 34,841 12,420 -247,118 143,804 -41,647 63,755 -12,320 61,370 -127,274 Purchase of securities -221,017 -304,834 -305,399 -1,229,524 -1,116,029 -1,015,753 -627,735 -491,010 -853,296 -892,611 Proceeds from sale of securities 38,130 154,558 95,016 825,796 1,104,447 836,754 558,025 395,753 852,237 667,313 Proceeds from redemption of securities 173,955 179,657 210,779 150,373 142,450 125,707 119,787 71,483 54,339 93,168 Interest and dividends received on 11,779 11,835 12,240 13,785 15,304 12,834 16,695 14,849 12,240 10,339 investment Purchase of tangible fixed assets -861 -2,037 -6,496 -4,929 -1,040 -1,398 -1,436 -955 -1,089 -2,553 Purchase of intangible assets -1,174 -1,857 -4,067 -3,053 -1,602 -1,282 -2,905 -3,015 -3,378 -3,258 Proceeds from sale of tangible assets 374 519 449 419 280 1,508 1,324 574 317 342 FCF (1+2) 14,153 26,630 85,677 390,583 -74,775 282,844 354,382 128,284 172,064 64,603 Cash flows from financing activities -19,869 -5,133 -3,249 -5,791 -3,945 -3,243 -8,884 -2,627 -5,852 18,342 Cash dividends paid -2,000 -1,942 -2,046 -2,040 -2,428 -2,544 -2,508 -2,616 -2,180 -1,828 Cash dividends paid to non-controlling -10 -10 -10 -13 -10 -10 -7 -5 -5 -5 interests Purchase of treasury stock -2,891 -3,194 -1,224 -3,786 -1,516 -4 -5,017 -4 -3,203 -2 Depreciation (A) 2,536 2,457 2,321 2,666 3,812 3,837 3,935 3,992 4,297 4,076 Change in cash and cash equivalents -5,713 21,541 82,449 384,820 -78,734 279,600 345,492 125,661 166,203 82,956 Cash and cash equivalents (year-end) 55,418 76,959 159,409 544,230 465,496 745,097 1,090,589 1,216,250 1,382,462 1,465,419

Source: Shared Research based on bank data Note: Figures may differ from bank materials due to differences in rounding methods.

Cash flows from operating activities

In FY03/21, cash inflows were JPY191.9bn, mainly on increases in call money and deposits. Cash flows in the Banking business do not show the changes in cash obtained from interest margins, but rather include the changes in deposits and loans that form the basis for interest margins. In other words, cash flows from operating activities do not reflect cash earned from core operations.

Cash flows from investing activities

Cash outflows were JPY127.3bn due to the acquisition of securities.

Cash flows from financing activities

Cash inflows were JPY18.3bn, due mainly to JPY20.0bn in revenue from the issuance of subordinated bonds.

As a result of the above, cash and cash equivalents at end-FY03/21 were up JPY83.0bn from the start of the fiscal year to JPY1.5tn. Historical performance FY03/21 results Summary

Ordinary income (consolidated): JPY79.1bn (+5.8% YoY) Core gross profit (non-consolidated): JPY41.0bn (-1.5% YoY) Core operating profit (non-consolidated): JPY11.8bn (-3.2% YoY) Ordinary profit (consolidated): JPY12.9bn (-2.2% YoY) (100.7% of the revised full-year target) Profit (consolidated): JPY6.8bn (-7.6% YoY) (100.8% of the revised full-year target)

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 58 At the consolidated level, ordinary income increased 5.8% YoY to JPY79.1bn. Ordinary expenses increased 7.6% YoY to JPY66.2bn. As a result, ordinary profit fell 2.2% YoY to JPY12.9bn, and profit attributable to owners of parent declined 7.6% YoY to JPY6.8bn. Non-consolidated ordinary profit fell JPY694mn YoY to JPY11.3bn, reflecting a JPY8.8bn decline in gross profit and a JPY8.3bn increase in non-recurring gains.

The JPY8.8bn YoY decline in gross profit reflected falls of JPY617mn in net interest income, JPY201mn in net fees and commissions, and JPY8.0bn in net other operating income (largely due to a fall of JPY8.2bn in net bond-related gains). The rise in non-recurring gains was driven by a JPY9.3bn increase in net stock-related gains, despite a JPY1.2bn rise in NPL disposal.

Core gross profit excluding net bond-related gains was down by JPY630mn YoY, and core operating profit was down by JPY384mn YoY. Gains on securities (net stock-related gains and net bond-related gains) increased JPY1.1bn YoY to JPY11.0bn, and the cost of credit rose JPY1.6bn to JPY11.3bn. As a result, the cost credit rate on loans outstanding was 43bp, up 5.7bp YoY.

Non-consolidated profit/losses

Core gross profit

Core gross profit fell JPY630mn YoY to JPY41.0bn. Net interest income was down JPY617mn YoY, and net fees and commissions decreased JPY201mn YoY.

Loans outstanding at the non-consolidated level were up JPY16.0bn YoY to JPY2.6tn, but interest on loans and discounts fell by JPY1.2bn YoY. Interest on loans and discounts from corporate loans based on business potential was flat, and was also flat for other corporate loans, so the bank explained that the main factor in the overall fall in interest on loans and discounts was a decline in loans outstanding to local public agencies. The bank said yields on domestic loans on a non-consolidated basis were in line with its expectations for a fall of about 5bp over the full year.

The bank recorded a 3.4% YoY decrease in net fees and commissions. It had expected a rebound from the impact of the COVID-19 pandemic in 2H FY03/21, but this did not materialize. For the full-year, it booked JPY611mn in Consultation services business income (down JPY50mn YoY) and JPY941mn in Bank cards business profit (up JPY179mn YoY).

General and administrative expenses

General and administrative expenses decreased JPY247mn YoY to JPY29.2bn. Non-personnel expenses decreased JPY87mn YoY, and personnel expenses were down JPY303mn YoY. Non-personnel expenses mainly consisted of higher system-related investment costs. OHR was 71.2%, up 0.4pp from 70.8% in FY03/20. The bank initially projected full-year FY03/21 OHR of 71.0–72.0%.

Core operating profit

Core operating profit declined JPY384mn YoY to JPY11.8bn.

Cost of credit

Cost of credit increased JPY1.6bn YoY to JPY11.3bn. The provision of allowance for general loan losses increased JPY386mn, and the NPL disposal amount increased JPY1.2bn. The credit cost rate (on JPY2.6tn of loans outstanding as of end-March 2021) was 43bp, up 5.7bp YoY from 37.3bp.

Gains/losses on securities

Net bond-related gains were down JPY8.2bn YoY and net stock-related gains were up JPY9.3bn, for total gains on securities of JPY11.0bn (up JPY1.1bn YoY). Unrealized gains on other available-for-sale securities were up roughly JPY54.7bn from JPY33.5bn at end-FY03/20 to JPY88.2bn.

Ordinary profit

Against a JPY1.6bn YoY cost of credit increase, gains on securities improved JPY1.1bn YoY, but ordinary profit declined JPY694mn YoY to JPY11.3bn as core gross profit slipped JPY630mn YoY.

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 59 Capital adequacy ratio

As of end-FY03/21, the total capital adequacy ratio on a consolidated basis stood at 13.04%, up 2.74pp from 10.30% as of end-FY03/20. At the non-consolidated level, the capital adequacy ratio was 12.73%, up 2.63pp YoY from 10.10% as of end- FY03/20. In July 2020, the bank issued its first subordinated debt (unsecured corporate bonds with early redemption clause [including special subordination contract and exemption rider in case of effective bankruptcy]) for an issue price of JPY10.0bn. Q3 FY03/21 results Summary

Ordinary income (consolidated): JPY62.7bn (+6.3% YoY) Core gross profit (non-consolidated): JPY30.8bn (-3.3% YoY) Core operating profit (non-consolidated): JPY9.0bn (-9.6% YoY) (89.7% of the revised full-year target) Ordinary profit (consolidated): JPY15.5bn (+17.5% YoY) (155.2% of the revised full-year target) Profit (consolidated): JPY9.3bn (+21.6% YoY) (206.9% of the revised full-year target)

At the consolidated level, ordinary income increased 6.3% YoY to JPY62.7bn. Ordinary expenses increased 3.1% YoY to JPY47.2bn. As a result, ordinary profit rose 17.5% YoY to JPY15.5bn, and profit attributable to owners of parent rose 21.6% YoY to JPY9.3bn. Non-consolidated ordinary profit rose JPY1.9bn YoY to JPY14.3bn, reflecting a JPY5.8bn decline in gross profit and a JPY7.9bn increase in non-recurring gains.

The JPY5.8bn YoY decline in gross profit reflected falls of JPY722mn in net interest income, JPY68mn in net fees and commissions, and JPY5.0bn in net other operating income (largely due to a fall of JPY4.8bn in net bond-related gains). The rise in non-recurring gains was driven by a JPY8.1bn increase in net stock-related gains despite a JPY404mn rise in NPL disposals.

Core gross profit excluding net bond-related gains was down by JPY1.1bn YoY, and core operating profit was down by JPY950mn YoY. Gains on securities (net stock-related gains and net bond-related gains) increased JPY3.3bn YoY to JPY13.1bn, and the cost of credit rose JPY618mn to JPY7.9bn. As a result, the cost credit rate on loans outstanding was 30bp, up 2bp YoY.

The bank raised its dividend forecast for FY03/21 from JPY60 to JPY70 per share. At the same time as announcing results, the bank also announced that it would start considering transferring to a holding company structure.

Non-consolidated profit/losses

Core gross profit

Core gross profit fell JPY1.1bn YoY to JPY30.8bn. Net interest income was down JPY722mn YoY, and net fees and commissions decreased JPY68mn YoY. Net other operating income (excluding net bond-related gains/losses) was down JPY264mn YoY.

Loans outstanding at the non-consolidated level were up JPY41.4bn YoY to JPY2.6tn, but interest on loans and discounts fell by JPY857mn YoY. Interest on loans and discounts from corporate loans based on business potential was flat, and was also flat for other corporate loans, so the bank explained that the main factor in the overall fall in interest on loans and discounts was a decline in loans outstanding to local public agencies. The bank said yields on domestic loans on a non-consolidated basis were in line with its expectations for a fall of about 5bp over the full year.

The bank recorded a 1.6% YoY decrease in net fees and commissions. It had expected a rebound from the impact of the COVID-19 pandemic in 2H FY03/21, but this appears not to have materialized. In cumulative Q3, it booked JPY387mn in Consultation services income (up JPY49mn YoY). The bank booked JPY1.2bn in Bank card business income (up JPY234mn YoY). However, lease receivables and investment assets were JPY35.7bn at end-Q3 (up JPY596mn from end-FY03/20) and Leasing business income was JPY1.1bn, up JPY91mn YoY. This appears to be tracking above bank target, making for a solid performance. Note: the bank booked roughly JPY100mn in M&A fees (one deal) in Q1 FY03/21, included in net fees and commissions.

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 60 General and administrative expenses

General and administrative expenses decreased JPY105mn YoY to JPY21.9bn. Non-personnel expenses increased JPY52mn YoY, but personnel expenses were down JPY242mn YoY. OHR was 70.9%, up 2.0pp from 68.9% in cumulative Q3 FY03/20. The bank initially projected full-year FY03/21 OHR of 71.0–72.0%.

Core operating profit

Core operating profit declined JPY950mn YoY to JPY9.0bn, mainly due to a JPY722mn decline in net interest income.

Cost of credit

Cost of credit increased JPY618mn YoY to JPY7.9bn. The provision of allowance for general loan losses increased JPY270mn, and the NPL disposal amount increased JPY404mn. The credit cost rate (on JPY2.6tn of loans outstanding as of end- December 2020) was 30bp, up 2bp YoY from 28bp. The bank expects that full-year cost of credit could reach JPY10.0bn. Shared Research will be watching to see to what extent loans classified as “special attention loans” by self-assessment deteriorate due to the fallout from the COVID-19 pandemic.

According to the bank, manufacturing industry businesses in the Hokuriku area have recovered more quickly than it expected since around May 2020, when the impact from the COVID-19 pandemic spread. Shared Research understands that the bank sees the service industry operating in a comparatively tough environment.

Gains/losses on securities

Net bond-related gains were JPY892mn (down JPY4.8bn YoY) and net stock-related gains JPY12.2bn (up JPY8.1bn YoY), for a total gains on securities of JPY13.1bn (up JPY3.3bn YoY). Unrealized gains on other available-for-sale securities were up roughly JPY44.2bn from JPY33.5bn at end-FY03/20 to about JPY77.7bn.

Ordinary profit

Although cost of credit increased JPY698mn YoY, ordinary profit rose 15.3% YoY to JPY14.3bn, as the bank booked an increase in non-recurring gains of JPY8.1bn YoY on growth in net stock-related gains.

Main accounts (non-consolidated)

Interest-bearing liabilities (period-end balance)

The balances of deposits (deposits + negotiable certificates of deposit [NCD]) were firm both for individual and corporate customers, rising about JPY269.1bn from end-FY03/20 to roughly JPY4.0tn as of end-December 2020 (JPY3.7tn as of end- FY03/20). Regarding individual deposit assets, government bonds were up roughly JPY600mn from end-FY03/20 to JPY27.1bn (JPY26.5bn as of end-FY03/20), investment trusts up about JPY7.5bn to roughly JPY81.3bn (from JPY73.8bn), and over-the-counter (OTC) insurance sales at bank branches down about JPY3.6bn to JPY152.7bn (from JPY156.3bn).

Interest-earning assets (period-end balance)

Loans outstanding were up about JPY11.6bn from end-FY03/20 (JPY2.617tn) to JPY2.629tn.

Capital adequacy ratio

At end-Q3 FY03/21, the consolidated total capital adequacy ratio on a consolidated basis stood at 12.64%, up 2.34pp from 10.30% at end-FY03/20. At the non-consolidated level, the capital adequacy ratio was 12.36%, up 2.26pp YoY from 10.10% at end-FY03/20. In July 2020, the bank issued its first subordinated debt (unsecured corporate bonds with early redemption clause [including special subordination contract and exemption rider in case of effective bankruptcy]) for an issue price of JPY10.0bn.

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 61 Topics

Move to holding company structure

On January 29, 2021, the bank announced that it had decided at a board of directors meeting held the same day to begin deliberations regarding a shift to a holding company structure, subject to approval at a general meeting of shareholders and necessary approvals by the relevant authorities. It said it was investigating a holding company structure for six companies including the bank with a target effective date of October 2021.

The bank said its primary aim in adopting a holding company structure was to maximize group synergies. Consolidating group management functions in a holding company and enhancing group governance would strengthen the autonomous management capabilities of subsidiaries. It also aimed to boost group management efficiency overall. Another aim is to grow the business. The bank said that it aimed to expand by growing businesses of its current subsidiaries under the holding company umbrella, and establishing a new company to support sustainable regional development.

Banks are allowed to hold shares in business companies entitling them to up to 5% of voting rights, but bank holding companies are allowed to hold stakes entitling them to up to 15% of voting rights. Accordingly, a holding company structure would afford the bank more opportunities to invest in business corporations. There is a precedent as Hiroshima Bank shifted to a holding company structure as Hirogin Holdings in October 2020. Shared Research thinks that the financial authorities will not set a high approval hurdle for the bank.

Hokkoku DX Cashless Fund

The bank is recognized as being ahead of its banking peers in digital transformation (DX) and plans to migrate its core banking system to the cloud in 2021. In October 2020, it established the Hokkoku DX Cashless Fund, in order to promote such initiatives among its regional corporate customers.

Fund size: JPY1.0bn

Term: Until March 2024

Aim: To solve the issues faced by corporations and local governments and realize the potential of the region by supporting initiatives to improve productivity, such as DX and cashless operations.

Subsidy targets: Corporations and local governments that will work with the bank in the areas of DX and cashless operations.

New service for individuals: Hokkoku Life+ (Hokkoku Life Plus)

The bank said it would start offering Hokkoku Life+ (Hokkoku Life Plus; new deposit account services for individuals) in spring 2021. It expects the offering to be ordinary deposit accounts featuring a debit card, cloud banking, elimination of all passbooks, and does not require the traditional seal used in place of a signature. The aim is to make transactions completely paperless and leverage the bank’s digital contacts with customers. In spring 2022, the bank plans to introduce a subscription- based product with higher service levels. 1H FY03/21 results Summary

Ordinary income (consolidated): JPY42.5bn (+7.5% YoY) Core gross profit (non-consolidated): JPY20.3bn (-2.2% YoY) Core operating profit (non-consolidated): JPY5.7bn (-9.4% YoY) (57.2% of revised full-year target) Ordinary profit (consolidated): JPY9.0bn (+3.5% YoY) (90.5% of revised full-year target) Profit (consolidated): JPY5.1bn (-3.3% YoY) (112.3% of revised full-year target)

At the consolidated level, ordinary income increased 7.5% YoY to JPY42.5bn. Ordinary expenses increased 8.7% YoY to JPY33.4bn. As a result, ordinary profit rose 3.5% YoY to JPY9.0bn, and profit attributable to owners of parent declined 3.3% YoY to JPY5.1bn, in line with the revised 1H target (announced on October 23, 2020) of JPY5.0bn. At the non-consolidated level, core operating profit fell 9.4% YoY to JPY5.7bn. Net interest income was down YoY due mainly to declines in interest on loans and discounts and in interest and dividends on securities. In general and administrative expenses, non-personnel

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 62 expenses expanded YoY. Non-consolidated ordinary profit declined 0.7% YoY to JPY8.3bn. The cost of credit rose by 47.2% YoY to JPY7.2bn. Gains on securities (net bond-related gains + net stock related gains) increased YoY.

Non-consolidated profit/losses

Core gross profit

Core gross profit fell JPY449mn YoY to JPY20.3bn. Net interest income was down JPY387mn YoY. Net fees and commissions rose JPY58mn YoY and net other operating income (excluding net gains/losses on bonds) fell by JPY122mn YoY. The rise in net fees and commissions was not enough to offset the decline in net interest income.

Net interest income Average loans outstanding at the non-consolidated level were up JPY61.5bn from end-FY03/20 to JPY2.6tn, but interest on loans and discounts fell by JPY540mn YoY. Interest on loans and discounts from corporate loans based on business potential (49.6% of loans outstanding at the non-consolidated level, up by JPY23.2bn from end-FY03/20) was flat, and turned upward for other loans (37.7%, up by JPY7.2bn), so the bank explained that the main factor in the overall fall in interest on loans and discounts was a decline in outstanding of loans to local public agencies and corporations (12.7%, down by JPY7.1bn). Yields on domestic loans on a non-consolidated basis fell by 0.05% (5bp) YoY to 0.95%. The bank looks for a decline of about 5bp over the full year.

The bank recorded a 2.1% YoY increase in net fees and commissions. The bank had to virtually cease all consulting services marketing in April and May 2020 due to the impact of the COVID-19 pandemic. In 1H, it booked JPY290mn in Consultation services income (up JPY76mn YoY). The bank booked JPY783mn in Bank card business income (up JPY199mn YoY). However, results from the Consultation services and Bank cards businesses appear to have come under 1H targets. That said, both businesses have returned to normal from August. Meanwhile, Leasing business income was JPY708mn, up JPY48mn YoY. This appears to be tracking above bank target, making for a solid performance. Note: the bank booked roughly JPY100mn in M&A fees (one deal) in Q1 FY03/21, included in net fees and commissions.

General and administrative expenses

General and administrative expenses increased JPY146mn YoY to JPY14.5bn. Personnel expenses were down JPY185mn YoY, but non-personnel expenses increased JPY228mn YoY. The rise in non-personnel expenses was due to increased investment in systems, and appears to have been in line with the bank’s expectations. OHR was 71.7%, up 2.2pp from 69.5% in 1H FY03/20. The bank initially projected full-year FY03/21 OHR of 71.0–72.0%.

Core operating profit

Core operating profit declined JPY595mn YoY to JPY5.7bn due mainly to a decline in net interest income and an increase in non-personnel expenses.

Cost of credit

Cost of credit (provision of allowance for general loan losses + non-performing loans (NPL) disposal amount - reversal of allowance for loan losses - recoveries of written-off claims) was up JPY2.3bn YoY to JPY7.2bn. The credit cost rate (on JPY2.6tn of loans outstanding as of end-August 2020) was 27bp, up 8bp YoY from 19bp. The bank expects that full-year cost of credit will reach JPY10.0bn. Shared Research will be watching to see to what extent loans classified as “special attention loans” by self-assessment deteriorate due to the fallout from the COVID-19 pandemic.

Gains/losses on securities

Net bond-related gains were JPY1.1bn (down JPY2.2bn YoY) and net stock-related gains JPY8.3bn (up JPY4.8bn YoY), for a total of JPY9.4bn (up JPY2.6bn YoY). Unrealized gains on other available-for-sale securities were up JPY32.7bn from end- FY03/20 to JPY66.3bn.Net bond-related gains were JPY1.1bn (down JPY2.2bn YoY) and net stock-related gains JPY8.3bn (up JPY4.8bn YoY), for a total of JPY9.4bn (up JPY2.6bn YoY). Unrealized gains on other available-for-sale securities were up JPY32.7bn from end-FY03/20 to JPY66.3bn.

Ordinary profit

Although cost of credit increased JPY2.3bn YoY, ordinary profit declined 0.7% YoY to JPY8.3bn, as the bank booked an increase in nonrecurring gains of JPY4.8bn YoY on growth in net stock-related gains.

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 63 Main accounts (non-consolidated)

Interest-bearing liabilities (period-end balance)

The balances of deposits (deposits + negotiable certificates of deposit [NCD]) were firm both for individual and corporate customers, rising JPY235.1bn from end-FY03/20 to JPY3.9tn as of end-September 2020. Regarding individual deposit assets, government bonds were down JPY528mn from end-FY03/20 to JPY25.9bn, investment trusts up JPY6.1bn to JPY79.9bn, and over-the-counter (OTC) insurance sales at bank branches down JPY2.7bn to JPY153.6bn.

Interest-earning assets (period-end balance)

Loans outstanding were up JPY23.3bn from end-FY03/20 to JPY2.6tn. Of this amount, 49.6% were corporate loans based on business potential, 37.7% consumer loans (including housing loans), and 12.7% were loans to local public agencies and corporations.

Capital adequacy ratio

At end-Q2 FY03/21, the consolidated total capital adequacy ratio stood at 12.17%, up 1.87pp from 10.30% at end-FY03/20. At the non-consolidated level, the capital adequacy ratio was 11.91%, up 1.81pp YoY from 10.10% at end-FY03/20. In July 2020, the bank issued its first subordinated debt (unsecured corporate bonds with early redemption clause [including special subordination contract and exemption rider in case of effective bankruptcy]) for an issue price of JPY10.0bn.

Topics

Hokkoku DX Cashless Fund

The bank is recognized as being ahead of its banking peers in digital transformation (DX) and plans to migrate its core banking system to the cloud in 2021. In October 2020, it established the Hokkoku DX Cashless Fund, in order to promote such initiatives among its regional corporate customers.

Fund size: JPY1.0bn

Term: Until March 2024

Aim: To solve the issues faced by corporations and local governments and realize the potential of the region by supporting initiatives to improve productivity, such as DX and cashless operations.

Subsidy targets: Corporations and local governments that will work with the bank in the areas of DX and cashless operations.

New service for individuals: Hokkoku Life+ (Hokkoku Life Plus)

The bank said it would start offering Hokkoku Life+ (Hokkoku Life Plus; new deposit account services for individuals) in spring 2021. It expects the offering to be ordinary deposit accounts featuring a debit card, cloud banking, elimination of all passbooks, and does not require the traditional seal used in place of a signature. The aim is to make transactions completely paperless and leverage the bank’s digital contacts with customers. In spring 2022, the bank plans to introduce a subscription- based product with higher service levels. Q1 FY03/21 results Summary

Ordinary income (consolidated): JPY22.1bn (+0.05% YoY) Core gross profit (non-consolidated): JPY10.9bn (-1.4% YoY) Core operating profit (non-consolidated): JPY3.6bn (-6.7% YoY) (60.5% of 1H target, 33.0% of full-year target) Ordinary profit (consolidated): JPY7.3bn (+24.7% YoY) (121.1%, 85.5%) Profit (consolidated): JPY4.8bn (+34.8% YoY) (137.7%, 107.1%)

At the consolidated level, ordinary income increased 0.05% YoY to JPY22.1bn. Interest on loans and discounts and interest and dividends on securities both declined, but the bank recorded an increase in gains/losses on securities (net bond-related

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 64 gains/losses + net stock-related gains). Ordinary expenses fell 8.8% YoY to JPY14.8bn due mainly to a decline in credit- related costs. As a result, ordinary profit rose 24.7% YoY to JPY7.3bn, and profit attributable to owners of parent rose 34.8% YoY to JPY4.8bn, surpassing the full-year target of JPY4.5bn. At the non-consolidated level, core operating profit fell 6.7% YoY to JPY3.6bn. Net interest income was down YoY due mainly to declines in interest on loans and discounts and in interest and dividends on securities. In general and administrative expenses, non-personnel expenses expanded YoY. Non-consolidated ordinary profit climbed 22.0% YoY to JPY6.9bn.

Non-consolidated profit/losses

Core gross profit

Core gross profit fell JPY158mn YoY to JPY10.9bn. Net interest income was down JPY187mn YoY. Net fees and commissions rose JPY85mn YoY, but the growth was not sufficient to offset the decline in net interest income. Net other operating income (excluding net gains/losses on bonds) was down JPY56mn YoY. The yield on corporate loans based on business potential remained in a downtrend, and the bank looks for a decline of about 5bp over the full year. At the same time, it indicated the yield on consumer loans is showing signs of bottoming out, reflecting effects of a 0.1% hike in its effective prime interest rate for new loans in autumn 2019.

The bank forecasts an 8% YoY increase in net fees and commissions for full-year FY03/21. Although its sales activities in April and May fell short of plan due to the impact of the COVID-19 pandemic, the bank recorded a 6.3% YoY increase in net fees and commissions in Q1 FY03/21 because it booked roughly JPY100mn in M&A fees (one deal).

Net other operating income fell 46.5% YoY to JPY948mn (of which net bond-related gains contributed JPY803mn). The bank manages roughly JPY80.0bn in investment trusts, but it was unable to record gains on sales by flexibly selling assets.

General and administrative expenses

General and administrative expenses increased JPY104mn YoY to JPY7.3bn. Personnel expenses were down JPY109mn YoY, but non-personnel expenses increased JPY239mn YoY. OHR was 66.8%, up 1.9pp from 64.9% in Q1 FY03/20. The bank projects full-year FY03/21 OHR of 71.0–72.0% (70.8% in FY03/20).

Core operating profit

Core operating profit declined JPY262mn YoY to JPY3.6bn, due mainly to a decline in net interest income and an increase in non-personnel expenses. The bank recorded zero gains/losses on cancellation of investment trusts.

Ordinary profit

Gains on securities fell JPY494mn YoY to JPY4.2bn, reflecting a YoY decline of JPY769mn in net bond-related gains and a YoY increase of JPY275mn in net stock-related gains. Gains on securities finished below the JPY9.9bn recorded in Q1 FY03/20 (net bond-related gains: JPY6.0bn, net stock-related gains: JPY4.0bn), but exceeded the bank’s FY03/21 full-year target of JPY2.5bn. Cost of credit fell JPY1.9bn YoY to JPY1.4bn. Ordinary profit rose 22.0% YoY to JPY6.9bn, driven by nonrecurring gains of JPY2.7bn attributable to growth in net stock-related gains and a reactionary decline in cost of credit.

Main accounts (non-consolidated)

Interest-bearing liabilities (period-end balance)

The balances of deposits (deposits + negotiable certificates of deposit [NCD]) were firm both for individual and corporate customers, rising JPY244.4bn YoY to JPY3.9tn. Individual deposit assets increased mainly on growth in individual deposits. Government bonds were up JPY2.4bn, investment trusts down JPY6.2bn, and over-the-counter (OTC) insurance sales at bank branches down JPY6.1bn.

Interest-earning assets (period-end balance)

Loans outstanding were up JPY79.6bn YoY to JPY2.6tn. Housing loans were up JPY37.7bn YoY.

Valuation difference on available-for-sale securities

Balance of securities with fair value was JPY1.0tn, and the valuation difference narrowed JPY12.5bn YoY to JPY57.9bn.

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 65 NPL trends

NPLs based on the Financial Reconstruction Act were down JPY1.0bn YoY to JPY59.0bn. The NPL ratio was 2.16%, down 0.1pp from 2.26% in Q1 FY03/20, but up 0.05pp from 2.11% at end-FY03/20. Allowance for loan losses rose due to deterioration of classification of claims (worth over JPY1.0bn) in Q1 FY03/20. In Q1 FY03/21, classification of claims worth JPY700mn was deteriorated. For FY03/21, Hokkoku Bank forecasts JPY6.0bn in cost of credit, JPY2.0bn above the typical annual amount. However, amid concerns over further economic impact from the COVID-19 pandemic, the bank does not rule out the possibility of an increase in cost of credit beyond JPY6.0bn.

Capital adequacy ratio

In Q1 FY03/21, the consolidated total capital adequacy ratio stood at 11.20%, up 0.9pp from 10.30% at end-FY03/20. At the non-consolidated level, the capital adequacy ratio was 10.96%, up 0.86pp YoY from 10.10% at end-FY03/20.

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 66 Other information History

Date Description Dec 1943 Hokkoku Bank was established by a merger of three banks in Ishikawa, namely Kano Godo Bank, Kashu Bank, and Nowa Bank, with its head office in Kanazawa Apr 1961 Started operating foreign exchange services Apr 1973 Listed on the Second Section of the Tokyo Stock Exchange and Second Section of the Osaka Securities Exchange (listing changed to First Section at both exchanges in 1974, delisted at the Osaka Securities Exchange in May 2010) Apr 1974 Established The Hokkoku General Leasing Co., Ltd. Jun 1981 Established The Hokkoku Credit Service Co., Ltd. Apr 1983 Started securities services (over-the-counter sales of JGBs and other) Jul Established The Hokkoku Credit Guarantee Co., Ltd. Nov 1993 Started trust agency services Dec 1998 Started handling mutual funds Feb 2000 Hokkoku Ishikawa JCB Card (established in April 1991) renamed to Hokkoku JCB Card Apr 2001 Started over-the-counter sales of insurance Apr 2005 Started securities brokerage services Apr 2009 Hokkoku Credit Service merged with Hokkoku JCB Card in an absorption-type merger Mar 2010 Established The Hokkoku Management, Ltd. Sep 2011 Established The Hokkoku Servicer, Ltd. Nov 2014 Completed construction of Hokkoku Head Office building in Kanazawa Mar 2016 Opened a branch in Singapore Oct 2018 Started trust banking services Jan 2019 Opened an office in Bangkok Sep Launched Hokkoku Cloud Banking Nov Established Digital Value Co., Ltd. May 2021 Launched operation of "Bank Vision on Azure," Japan's first public-cloud full banking system

Source: Shared Research based on bank data Consolidated subsidiaries

Consolidated subsidiary Main business Established Capital (JPYmn) Voting rights ratio Hokkoku General Leasing Leasing Apr 1974 90 50.35% Co., Ltd. Hokkoku Credit Services Credit card services Jun 1981 90 75.49% Co., Ltd. Hokkoku Credit Guarantee Credit guarantee services for consumer financing Jul 1983 90 18.33% Co., Ltd. Hokkoku Management, Corporate revitalization fund, accounting work for subsidiaries, online Mar 2010 100 100.00% Ltd. marketplace operation) Hokkoku Servicer, Ltd. Debt collection Sep 2011 500 95.00% Digital Value Co., Ltd. System development, operation, and management Nov 2019 90 90.00% CC Innovation, Ltd. Consulting services Jun 2021 QR Investment, Ltd. Investment specialist Jun 2021 FD Advisory, Ltd. Investment advisory May 2021

Source: Shared Research based on bank data

The two non-consolidated subsidiary companies are Ishikawa Small Business Revitalization No. 2 Fund Investment Limited Liability Partnership and Ishikawa Small Business Revitalization No. 3 Fund Investment Limited Liability Partnership. ESG measures

By actively working to resolve ESG (Environmental, Social, and Governance) issues through its business activities, Hokkoku Bank hopes to work with all its stakeholders, including local communities, to realize a sustainable society. The bank believes that the resolution of ESG issues through its business activities and the virtuous cycle of sustained improvement in earnings brought about by these efforts will lead to the realization of its company philosophy "To be a prosperous future, expand the circle of mutual trust, and build a prosperous future together with the community."

Materiality Specific Initiatives ■ Environmental conservation efforts though the bank's core business ■ E Climate change mitigation and environmental Reducing environmental impact through corporate activities ■ Climate change (Environment) conservation measures ■ Providing consulting functions ■ Contributing to the creation of a cashless Contribution to the revitalization of the regional economy society ■ Life planning and asset building support ■ Maintaining financial S (Social) function stability Developing human resources that contribute to ■ Fostering professional human resources ■ Ensuring a proper work-life improving regional quality balance ■ Promoting diversity ■ Promoting recurrent education ■ Visualization of internal information and discussion processes through DX- G Enhancing management clarity through dialog with based corporate transformation ■ Corporate governance structure ■ Risk (Governance) shareholders management structure ■ Compliance ■ Enhanced business efficiency ■Capital strategies

Source: Shared Research based on bank data

As part of its effort to contribute to creating a cashless society, the bank established the Hokkoku DX Cashless Fund (total funds of JPY1bn, through March 2024). Subsidies from the fund are available to companies and local governments that work

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 67 with the bank in areas such as DX and cashless services. The bank aims to provide support in DX and cashless systems to help companies and local government improve productivity and resolve issues, with the ultimate aim of realizing its vision for the region. Top management

Shuji Tsuemura

Joined Hokkoku Bank. Assigned to Musashigatsuji Branch. In charge of forex and fundraising at 1985 international banking unit. Engaged in the planning and development of product services at the Business Planning Division and Business Development Division. 1995 Involved in the establishment of the Hong Kong Branch and worked there. 1998 Assigned to the HR Department. As the customer relationship management (CRM) project team leader in the General Planning 2000 Department, led the CRM Organization Capability Rebuilding Project, the Strategic Cost Reduction Project, the Financing Innovation Project, and the System Strategy Rebuilding Project. Appointed Executive Officer, General Manager of General Planning Department and Information 2008 Systems Department. Appointed Director and Executive Officer, General Manager of General Planning Department and 2009 Operations Department. Appointed Managing Director and Executive Officer, General Manager of General Planning 2010 Department. Appointed Managing Director and Executive Officer, General Manager of General Planning 2011 Department and Human Resources Development Office. Appointed Senior Managing Director. Oversaw the Productivity Improvement Project (internally referred to as “Double Productivity Initiative”), Core Banking System Migration Project, New 2013 Headquarters Construction Project, and Internationally Active Bank Project (establishment of Singapore branch). 2014 Appointed Senior Managing Director, Representative Director. 2017 Promoted digital transformation across the bank. June 2020 Appointed President (Representative Director). Corporate governance (end-March 2021)

Form of organization and capital structure Form of organization Company with Audit & Supervisory Committee Controlling shareholder and parent company None Directors and Audit & Supervisory Committee members Number of directors under Articles of Incorporation 21 Number of directors 12 Directors' terms under Articles of Incorporation 1 year Chairman of the Board of Directors President Number of outside directors 5 Number of independent outside directors 5 Number of members of Audit & Supervisory Committee 6 Number of outside members of Audit & Supervisory Committee 5 Other Participation in electronic voting platform Yes Providing convocation notice in English Yes Eligible for stock option None Disclosure of individual director's compensation None Policy on determining amount of compensation and calculation methodology Yes Corporate takeover defenses None

Source: Shared Research based on bank data Dividend policy

Hokkoku Bank’s dividend policy calls for stable and continuous dividend payments, with the bank targeting a total returns ratio of 40%, including a stable dividend of JPY70 per share and share buybacks. It pays dividends from surplus twice each year, as interim and year-end dividends. Interim dividends are determined by the board of directors, and year-end dividends by the general meeting of shareholders. In FY03/21, the bank targeted an annual dividend of JPY80 per share, breaking down into an interim dividend of JPY30 and a year-end dividend of JPY50. For FY03/22, it projects an interim dividend of JPY35 and a year-end dividend of JPY35, for a total annual dividend of JPY70 per share.

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 68 Major shareholders

Top shareholders Shares held ('000) Shareholding ratio Custody Bank of Japan, Ltd. (Trust account) 1,621 5.76% Meiji Yasuda Life Insurance Company 1,564 5.56% Nippon Life Insurance Company 1,311 4.66% The Master Trust Bank of Japan, Ltd. (Trust account) 1,272 4.52% Sumitomo Life Insurance Company 770 2.74% Hokuriku Electric Power Company 669 2.38% DFA Intl Small Cap Value Portfolio 576 2.05% Hokkoku Bank Employees Shareholding Association 552 1.96% Japan Trustee Services Bank, Ltd. (Trust account 5) 370 1.31% Sawade Shoji Co., Ltd. 325 1.15% SUM 9,030 32.09%

Source: Shared Research based on bank data Note: As of end-March 2021. Employees

Number of employees (consolidated): 1,816 (average number of temporary employees: 462) (end-March 2020) Banking business: 1,788 (459); Leasing business: 28 (3)

Number of employees (non-consolidated): 1,759 (447) Average age: 41.1 Average years of service: 17.3 Average annual salary: JPY6.4mn

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 69 News and topics Full-year FY03/21 results/ medium- to long-term management strategy

2021-04-28

On April 28, 2021, the Hokkoku Bank, Ltd. announced earnings results for full-year FY03/21; see the results section for details.

On the same day, the Bank announced that it had formulated a medium- to long-term management strategy.

The bank announced as its current medium-term business plan “Communication x Collaboration x Innovation 2024” in November 2019. It is the revised and updated version of “Communication x Collaboration x Innovation 2021,” which was formulated in FY03/18. The bank traditionally announced a medium-term business plan every three years, but changed to a format of visualizing five- and ten-year targets and updating annually its strategies and implementation policies to attain them.

Medium-term target levels:

Profit and other numerical targets for five and ten years ahead are as follows.

FY03/21 FY03/26 FY03/31 CAGR (FY03/21– CAGR (FY03/21– CAGR (FY03/26– (JPYmn) Act. Five years ahead Ten years ahead FY03/26) FY03/31) FY03/31) Recurring profit (cons.) 12,800 16,000 21,000 4.6% 5.1% 5.6% Net interest income 34,600 33,500 33,000 -0.6% -0.5% -0.3% Net fees and commissions 8,100 12,000 15,500 8.2% 6.7% 5.3% Bank cards 1,500 3,400 4,000 17.8% 10.3% 3.3% Leasing 1,800 1,900 2,500 1.1% 3.3% 5.6% Consultation 600 2,000 4,000 27.2% 20.9% 14.9% Other new businesses 0 200 500 - - 20.1% Personnel expenses 14,500 13,500 13,000 -1.4% -1.1% -0.8% Non-personnel expenses 13,400 14,000 13,000 0.9% -0.3% -1.5% Core system costs 5,800 6,300 4,800 1.7% -1.9% -5.3% Profit (cons.) 6,700 10,000 13,000 8.3% 6.9% 5.4% Income from new businesses (cons.) 3,900 7,500 11,000 14.0% 10.9% 8.0% Overhead ratio (core gross profit-based; cons.) 70.7% 65.0% 55–60% ROE (cons.) 2.5% 3.5% 4.5%

Net interest income includes investment income from an investment company that the bank plans to establish. Income from new businesses (consolidated) is income from new businesses including bank card, leasing, and consulting. Other new businesses include business income from a planned investment advisory company, e-commerce mall, etc. Source: Shared Research based on bank data

Strategy outline:

Expand business bases (augment business bases/areas through new businesses and expand customer base of existing businesses through evolution process)

Make credit risk management and support system more sophisticated (management improvement support by understanding business feasibility and strengthening consulting functions)

Maximize group synergies

Train people able to contribute toward improving regional quality (increase mobility of group personnel and train next- generation management team)

On the same day, the company announced that it planned to transition to a holding company structure by means of a sole share transfer effective October 1, 2021.

Purpose of transition to holding company structure:

Maximize group synergies

Expand business bases

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 70 Transition process:

Establish holding company through a share transfer effective October 1, 2021. Hokkoku Bank will become a wholly owned subsidiary of the holding company.

After the establishment of the holding company, all subsidiaries and subsidiary corporations (excluding two non- consolidated subsidiaries) will be reorganized as companies directly held by the holding company, using methods such as paying distribution-in-kind to the holding company for all shares held by Hokkoku Bank.

Outline of share transfer:

1. Schedule

Annual general meeting of shareholders record date: March 31, 2021 Board of directors’ meeting to approve share transfer plan: April 28, 2021 Annual general meeting of shareholders to approve share transfer plan: June 18, 2021 (planned) Hokkoku Bank shares delisting date: September 29, 2021 (planned) Registration date of establishment of holding company (effective date): October 1, 2021 (planned) Holding company shares listing date: October 1, 2021 (planned)

2. Method: Sole share transfer

3. Share transfer ratio: 1:1

4. Listing of holding company shares: New listing on Tokyo Stock Exchange First Section scheduled for October 1, 2021. Hokkoku Bank shares are scheduled to be delisted on September 29, 2021.

On the same day, the bank announced a share buyback.

Outline of share buyback:

Class of shares to be acquired: Hokkoku Bank common stock Total number of shares to be acquired: Up to 200,000 shares (0.71% of outstanding shares) Total acquisition price: Up to JPY740mn Total acquisition price: Up to JPY740mn

Upward revision of its full-year FY03/21 earnings forecast and year-end dividend forecast

2021-04-19

On April 19, 2021, Hokkoku Bank, Ltd. announced an upward revision of its full-year FY03/21 earnings forecast and year-end dividend forecast.

FY03/20 FY03/21 YoY (JPYmn) 1H Act. 2H Act. FY Act. 1H Act. Rev. FY Est. Rev. FY Est. FY Est. Rev. FY Est. Rev. FY Est. FY Est. (Apr.19, 2021) (Oct. 30, 2020) (May 15, 2020) (Apr.19, 2021) (Oct. 30, 2020) (May 15, 2020) Consolidated ordinary income 39,483 35,257 74,740 42,451 Consolidated ordinary profit 8,746 4,435 13,181 9,049 12,800 10,000 8,500 -2.9% -24.1% -35.5% Consolidated profit 5,229 2,081 7,310 5,054 6,700 4,500 4,500 -8.3% -38.4% -38.4% Core gross profit (non-cons.) 20,704 20,880 41,584 20,255 Core operating profit (non-cons.) 6,317 5,845 12,162 5,722 - 10,000 11,000 - -17.8% -9.6% Ordinary profit (non-con.) 8,339 3,638 11,977 8,279 11,200 9,000 7,500 -6.5% -24.9% -37.4% Profit (non-cons.) 5,018 1,658 6,676 4,645 5,900 4,000 4,000 -11.6% -40.1% -40.1%

Source: Shared Research based on bank data

Upward revision of its dividend forecast for FY03/21

2021-01-29

On January 29, 2021, the bank announced the upward revision of its dividend forecast for FY03/21.

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 71 On the same day, the bank also announced it would start considering transferring to a holding company structure.

Upward revision to its 1H FY03/21 earnings forecast

2020-10-23

On October 23, 2020, the bank announced an upward revision to its 1H FY03/21 earnings forecast.

The details of the upward revision to its 1H FY03/21 earnings forecast are as follows.

FY03/20 FY03/21 YoY （JPYmn） 1H Act. 2H Act. FY Act. Rev. 1H Est. 1H Est. FY Est. Rev. 1H Est. 1H Est. FY Est. (Oct 23, 2020) (May 15, 2020) (May 15, 2020) (May 15, 2020) (May 15, 2020)

Consolidated ordinary income 39,483 35,257 74,740 Consolidated ordinary profit 8,746 4,435 13,181 9,000 6,000 8,500 2.9% -31.4% -35.5% Consolidated profit 5,229 2,081 7,310 5,000 3,500 4,500 -4.4% -33.1% -38.4% Core gross profit（non-cons.） 20,704 20,880 41,584 Core operating profit（non-cons.） 6,317 5,845 12,162 6,000 11,000 -5.0% -9.6% Ordinary profit（non-cons.） 8,339 3,638 11,977 8,200 5,500 7,500 -1.7% -34.0% -37.4% Profit（non-cons.） 5,018 1,658 6,676 4,600 3,000 4,000 -8.3% -40.2% -40.1%

Source: Shared Research based on bank data

Reason for upward revision to 1H FY03/21 earnings forecast: Gains/losses on securities are expected to exceed the initial forecast on the non-consolidated basis.

Full-year earnings forecast: The bank plans to disclose a revision to its full-year forecast at the time of the announcement of the 1H FY03/21 results scheduled for October 30, 2020.

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 72 Profile

Company Name Head Office The Hokkoku Bank, Ltd. 2-12-6 Hirooka, Kanazawa, Ishikawa, Japan

Phone Listed On 076-263-1111 The First Section of the Tokyo Stock Exchange

Established Exchange Listing 1943-12-18 1973-04-02

Website Fiscal Year-End https://www.hokkokubank.co.jp/ Mar

IR Contact IR Web - https://www.hokkokubank.co.jp/english/index.

IR Phone html - IR Email [email protected]

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 73 About Shared Research Inc.

We offer corporate clients comprehensive report coverage, a service that allows them to better inform investors and other stakeholders by presenting a continuously updated third-party view of business fundamentals, independent of investment biases. Shared Research can be found on the web at https://sharedresearch.jp.

Current Client Coverage of Shared Research Inc.

3- D Matrix Ltd. E・J Holdings Inc. KUMIAI CHEMICAL INDUSTRY CO., LTD. SanBio Company Limited ADJUVANT COSME JAPAN CO., LTD. Earth Corporation Lacto Japan Sanix Incorporated Advance Create Co., Ltd. Edion Corporation Lasertec Corporation Sanrio Company, Ltd. AEON DELIGHT CO., LTD. Elecom Co., Ltd. Locondo, Inc. SATO HOLDINGS CORPORATION Aeon Fantasy Co., Ltd. en Japan Inc. Luckland Co., Ltd. SBS Holdings, Inc. Ai Holdings Corp. Estore Corporation Marumae Co., Ltd. Seikagaku Corporation AI inside Inc. euglena Co., Ltd. Matsui Securities Co., Ltd. Seria Co., Ltd. AirTrip Corp. FaithNetwork Co., Ltd. Media Do Co., Ltd. Serverworks Co., Ltd. and factory, inc. Ferrotec Holdings Corporation Medical System Network Co., Ltd. SHIFT Inc. Anest Iwata Corporation Fields Corporation MEDINET Co., Ltd. Shikigaku Co., Ltd. AnGes, Inc. Financial Products Group Co., Ltd. MedPeer, Inc. Shinanen Holdings Co., Ltd. Anicom Holdings, Inc. First Brothers Co., Ltd. Mercuria Investment Co., Ltd. SHIP HEALTHCARE HOLDINGS, INC. ANRITSU CORPORATION FreeBit Co., Ltd. Metaps Inc. SIGMAXYZ Inc. Apaman Co., Ltd. Gamecard-Joyco Holdings, Inc. Micronics Japan Co., Ltd. SMS Co., Ltd. ARATA CORPORATION GameWith, Inc. MIRAIT Holdings Corp. Snow Peak, Inc. Arealink Co., Ltd. GCA Corporation Monex Group, Inc. Solasia Pharma K.K. ArtSpark Holdings Inc. GiG Works Inc. Morinaga Milk Industry Co., Ltd. SOURCENEXT Corporation AS ONE Corporation Good Com Asset Co., Ltd. Mortgage Service Japan Limited Space Value Holdings Co., Ltd. Ateam Inc. Grandy House Corporation MRT Inc. Star Mica Holdings Co., Ltd. Atrae, Inc. H2O Retailing Corporation Nagase & Co., Ltd. Strike Co., Ltd. Aucfan Co., Ltd. Hakuto Co., Ltd. NAIGAI TRANS LINE LTD. Sunnexta Group Inc. AVANT CORPORATION Hamee Corp. NanoCarrier Co., Ltd. Suzumo Machinery Co., Ltd. AXELL CORPORATION Happinet Corporation NEC Networks & System Integration Corporation SymBio Pharmaceuticals Limited Azbil Corporation Harmonic Drive Systems Inc. NEO MARKETING INC. Synchro Food Co., Ltd. AZoom Co., Ltd. HENNGE K.K. Net Marketing Co., Ltd. Taiyo Holdings Co., Ltd. B-Lot Co., Ltd. HIDAY HIDAKA Net One Systems Co., Ltd. Takashimaya Co., Ltd. Base Co., Ltd. Hosokawa Micron Corporation Nichi-Iko Pharmaceutical Co., Ltd. Take and Give Needs Co., Ltd. BEENOS Inc. HOUSE DO Co., Ltd. Nihon Chouzai Co., Ltd. TEAR Corporation Bell-Park Co., Ltd. HPC Systems Inc. Nihon Denkei Co., Ltd. Tenpo Innovation Inc. Benefit One Inc. i-mobile Co., Ltd. Nippon Commercial Development Co., Ltd. The Hokkoku Bank, Ltd. Broadleaf Co., Ltd. IDOM Inc. Nippon Koei Co., Ltd. TKC Corporation CanBas Co., Ltd. IGNIS LTD. Nippon Parking Development Co., Ltd. TOCALO Co., Ltd. Canon Marketing Japan Inc Inabata & Co., Ltd. Nipro Corporation TOKAI Holdings Corporation Career Design Center Co., Ltd. Infocom Corporation Nisshinbo Holdings Inc. Tokyu Construction Co., Ltd. Carna Biosciences, Inc. Infomart Corporation Nisso Corporation Tosei Corporation CARTA HOLDINGS, INC. INTELLIGENT WAVE INC. NS TOOL CO., LTD. Toyo Ink SC Holdings Co., Ltd. CERES INC. ipet Holdings, Inc. OHIZUMI MFG. CO., LTD. Toyo Tanso Co., Ltd. Chiyoda Co., Ltd. Itochu Enex Co., Ltd. Oisix ra daichi Inc. Toyobo Co., Ltd. Chori Co., Ltd. ItoKuro Inc. Oki Electric Industry Co., Ltd. Tri-Stage Inc. Chugoku Marine Paints, Ltd. J Trust Co., Ltd. OLBA HEALTHCARE HOLDINGS, Inc. Tsuruha Holdings Inc. Cocokara Fine Inc. JAFCO Group Co., Ltd. Ono Sokki Co., Ltd. Tsuzuki Denki Co., Ltd. Comsys Holdings Corporation Japan Best Rescue System Co., Ltd. Onward Holdings Co., Ltd. ULURU.CO., LTD. COTA Co., Ltd. JINS Holdings Inc. P3, inc. URBANET CORPORATION CRE, Inc. JP-Holdings, Inc. Pan Pacific International Holdings Corporation V-cube, Inc. Creek & River Co., Ltd. JSB Co., Ltd. PARIS MIKI HOLDINGS Inc. VISION INC. Daiichi Kigenso Kagaku Kogyo Co., Ltd. JTEC CORPORATION PCA Corporation VISIONARY HOLDINGS CO., LTD. Daiseki Co., Ltd. Kameda Seika Co., Ltd. Pigeon Corp. Voltage Inc. Daiwabo Holdings Co., Ltd. Kanamic Network Co., Ltd. QB Net Holdings Co., Ltd. World Holdings Co., Ltd. Delta-Fly Pharma, Inc. Kanematsu Corporation RACCOON HOLDINGS, Inc. WOW WORLD Inc. Demae-can Co., Ltd. kaonavi, inc. Raysum Co., Ltd. Yellow Hat Ltd. DIC Corporation KFC Holdings Japan, Ltd. Resorttrust, Inc. Yoshinoya Holdings Co., Ltd. Digital Arts Inc. KI-Star Real Estate Co., Ltd. RIDE ON EXPRESS HOLDINGS Co., Ltd. Zappallas, Inc. Digital Garage, Inc. KLab Inc. Rizap Group, Inc. ZIGExN Co., Ltd. Doshisha Corporation Kondotec Inc. ROUND ONE Corporation ZUU Co., Ltd. Dream Incubator Inc. Kringle Pharma, Inc. Ryohin Keikaku Co., Ltd. Attention: If you would like to see companies you invest in on this list, ask them to become our client, or sponsor a report yourself.

Disclaimer: This document is provided for informational purposes only. No investment opinion or advice is provided, intended, or solicited. Shared Research Inc. offers no warranty, either expressed or implied, regarding the veracity of data or interpretations of data included in this report. We shall not be held responsible for any damage caused by the use of this report. The copyright of this report and the rights regarding the creation and exploitation of the derivative work of this and other Shared Research Reports belong to Shared Research. This report may be reproduced or modified for personal use; distribution, transfer, or other uses of this report are strictly prohibited and a violation of the copyright of this report. Our officers and employees may currently, or in the future, have a position in securities of the companies mentioned in this report, which may affect this report’s objectivity.

Japanese Financial Instruments and Exchange Law (FIEL) Disclaimer: The report has been prepared by Shared Research under a contract with the company described in this report (“the company”). Opinions and views presented are ours where so stated. Such opinions and views attributed to the company are interpretations made by Shared Research. We represent that if this report is deemed to include an opinion from us that could influence investment decisions in the company, such an opinion may be in exchange for consideration or promise of consideration from the company to Shared Research. Contact Details Shared Research Inc. 3-31-12 Sendagi Bunkyo-ku Tokyo, Japan

https://sharedresearch.jp

Phone: +81 (0)3 5834-8787

Email: [email protected]

Hokkoku Bank/ 8363

Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp 74