Hokuhoku Financial Group, Inc. Annual Report 2016 Annual Report 2016 Year ended March 31, 2016 Hokuhoku Financial Group, Inc. Company outline (as of March 31, 2016) Company name: Hokuhoku Financial Group, Inc. Date of establishment: September 26, 2003 Location of head office: 1-2-26 Tsutsumicho-dori, Toyama City Purpose of business: Management and control of subsidiaries and affiliates and ancillary and related business Capital: ¥70,895 million Shares issued and outstanding: Common stock ……………………… 1,351,630,146 Preferred stock (Type 5) …………… 107,432,000 Exchange listings: ‌Tokyo Stock Exchange (First Section) Sapporo Securities Exchange This document contains forward-looking statements. Statements of this kind do not constitute guarantees of future performance, as factors such as changes in the operating environment may cause actual performance to differ. The figures stated in this document are, in principle, rounded down to the nearest whole unit. CONTENTS Profile ……………………………………………………………………… 1 Message from the Management ………………………………………… 2 Medium-term Management Plan ………………………………………… 4 Performance Highlights ………………………………………………… 6 Corporate Governance …………………………………………………… 10 Measures for Compliance………………………………………………… 13 Measures for Risk Management ………………………………………… 15 Characteristics of Our Main Business Area …………………………… 20 Corporate Social Responsibility ………………………………………… 22 Topics ……………………………………………………………………… 24 Consolidated Financial Statements Consolidated Balance Sheet ………………………………………… 27 Consolidated Statement of Income ………………………………… 28 Consolidated Statement of Comprehensive Income ……………… 28 Consolidated Statement of Changes in Equity ……………………… 29 Consolidated Statement of Cash Flows …………………………… 31 Notes to Consolidated Financial Statements ……………………… 32 Independent Auditor’s Report …………………………………………… 61 Non-consolidated Financial Statements The Hokuriku Bank, Ltd. Non-consolidated Balance Sheet (Unaudited) …………………… 62 Non-consolidated Statement of Income (Unaudited) …………… 63 The Hokkaido Bank, Ltd. Non-consolidated Balance Sheet (Unaudited) …………………… 64 Non-consolidated Statement of Income (Unaudited) …………… 65 Corporate Information …………………………………………………… 66 Outline of Subsidiaries — Hokuriku Bank ……………………………… 67 Outline of Subsidiaries — Hokkaido Bank ……………………………… 68 Board of Directors and Audit & Supervisory Board Members ………… 69 简单的本集团中文简要…………………………………………………… 70 Profile The operations of the Hokuhoku Financial Group Since its establishment in 1877, Hokuriku Bank has extend beyond the limits of a single district. developed an extensive network of branches throughout Our extensive network is outlined below. the Hokuriku district. On account of trade through the Hokuriku district …………………………… 150 branches Kitamae-bune or “Northbound Ships,” branches extended Toyama prefecture …………………………… 92 branches to the major cities of Hokkaido, enabling the bank to Ishikawa prefecture ………………………… 36 branches meet customers’ needs. The Hokkaido Bank, which was Fukui prefecture ……………………………… 22 branches established in 1951, has developed a network of branches Hokkaido …………………………………… 158 branches throughout Hokkaido, and built a firm business structure Three major metropolitan areas ………… 16 branches centered on individuals and small and medium-sized Tokyo and Yokohama ……………………… 9 branches enterprises. Nagoya ……………………………………… 3 branches The Hokuriku Bank, Ltd. and The Hokkaido Bank, Ltd. Osaka and Kyoto …………………………… 4 branches underwent management integration in September 2004 to form the Hokuhoku Financial Group Inc., which today oper- Others (Sendai, Niigata, Nagano, Takayama) … 4 branches ates a super-regional financial network that encompasses Overseas …………………………………… 9 offices the Hokuriku region, Hokkaido, and Japan’s three major New York Representative Office (Hokuriku Bank) metropolitan areas (Tokyo, Osaka, and Nagoya areas). Yuzhno-Sakhalinsk Representative Office (Hokkaido Bank) Vladivostok Representative Office (Hokkaido Bank) London Representative Office (Hokuriku Bank) Singapore Representative Office (Hokuriku Bank) Comprehensive business alliance Bangkok Representative Office (Hokuriku Bank) May 2002 between Dalian Representative Office (Hokuriku Bank) Hokuriku Bank and Hokkaido Bank Shanghai Representative Office (Hokuriku Bank) Shenyang Representative Office (Hokkaido Bank) Agreement on full integration of (As of June 30, 2016) May 2003 management of Hokuriku Bank and Hokkaido Bank London Vladivostok Yuzhno Shenyang Sakhalinsk New York September Hokugin Financial Group, Inc. Dalian 2003 established Shanghai Hokuriku Bank Group comes under Bangkok management of Hokugin Financial Singapore Group Management integration effected through equity swap Hokkaido September Hokuhoku Financial Group, Inc. was 2004 born. Hokuriku district Ishikawa Toyama Fukui Tokyo Osaka Nagoya Three major metropolitan areas Hokuhoku Financial Group, Inc. Annual Report 2016 1 MESSAGE FROM THE MANAGEMENT Left: Eishin Ihori Right: Masahiro Sasahara President Deputy President (concurrently serving as president of (concurrently serving as president of The Hokuriku Bank, Ltd.) The Hokkaido Bank, Ltd.) 2 Hokuhoku Financial Group, Inc. Annual Report 2016 We would like to express our sincere appreciation to all of you for your continued support of the Hokuhoku Financial Group and its group companies. In the Company’s primary operating regions, the Hokuriku Shinkansen was launched in March of last year, while the Hokkaido Shinkansen was launched in March of this year. As both areas had previously been blessed with tourism resources, the number of tourists from both outside and within Japan has been on a rising trend. With the launch of the Shinkansen, we expect this momentum to accelerate and feel that the conditions are right for a virtuous cycle in both tourism and business. On the other hand, due to the declining birthrate, the ageing of the population, the shift of the population to urban areas and the increasing corporate focus on overseas regions, we forecast that the contraction in the market will continue. Moreover, in addition to rivalry with other local banks, we expect a continuation of the severe operating environment due to competition stemming from the expansion of business by the Japan Post Bank and by internet-only banks, due to the contraction in profit margins in the loan business caused by the quantitative easing policy with negative interest rates and due to lower yields on domestic bonds. In such an operating environment, the Group began working on its new “BEST for the Region” medium-term management plan in April of this year, focusing on the policies below in order to contribute to the development of regional economies through the stable provision of financial services. First, we will work on initiatives to develop proposal and service capabilities that exceed our customers’ expectations. Through providing the No.1 regional financial services by strengthening efforts with regard to consulting that matches the customer’s stage of life and assessing business possibilities, and by reinforcing convenience and functionality through building out IT infrastructure, we aim to be a regional financial group that is trusted and chosen by, and that contributes to, both customers and local communities. Second, in order to achieve sustainable growth for the Group, we will take up the challenge of building out functional and efficient group structures for management and sales. As well as pursuing the benefits to group management of consolidating the administrative and back office operations, we will push ahead with developing retail and service channels that match the changing needs of customers, while making efforts to realize a functional organization that can win out against the competition and to maintain a stable financial base that earns trust from local community. In addition to reforming itself to deal with the changing environment, by offering financial services rooted in the egions,r the Group plays a role in the “Vitalizing Local Economy” program and we strive to be “a financial group that achieves growth and development together with local communities.” We ask for your continued support and patronage. July 2016 Eishin Ihori Masahiro Sasahara President Deputy President Hokuhoku Financial Group, Inc. Annual Report 2016 3 MEDIUM-TERM MANAGEMENT PLAN Hokuhoku Financial Group has launched its Medium-term Management Plan “BEST for the Region” for the three year period from April 2016 to March 2019. We have achieved all financial targets set in the previous mid-term management plan. Although interest income on loans decreased under the low interest rate environment, we achieved the target of net income by decreasing funding cost and increasing income on securities through diversified investment, as well as reducing G&A expenses. Due to the negative interest rate policy in Japan, we are faced with challenges such as difficulty in security investment and declining interest rate on loans. In a long-term perspective, we recognize that the shrinking population and the aging of society in our prime area will be significant challenges. Given the environment, under New Medium-term Management Plan “BEST for the Region”, we will develop an efficient and sustainable business model and pursue synergy effect to contribute to the growth of regional economy. Using our widespread network and improving management efficiency, we contribute to customers and local communities by providing No.1 financial service and solution, and achieve growth and development together