Business and Other Risks

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The risks below could affect AEON Financial Service Co., Ltd. (the “Company”) and the AEON Financial Service Group (the “Group”), and could have a major impact on investors’ decisions. Items below that deal with future events are based on our judgment as of February 29,2020. Potential risks are not limited to those listed below.

1.Unfavorable Economic Environment or Financial Market Turmoil

A. The Group conducts business in Japan and in Asian countries and regions such as Hong Kong, Thailand and Malaysia. An unfavorable economic environment or financial market turmoil in Japan or Asia could cause the Group’s business to slow and its assets to decrease in value.

B. The Group provides financial services to individuals. Protracted weakness in employment, household income or personal consumption due to an unfavorable economic environment in the countries and regions the Group serves could reduce the Group’s transaction volume and operating income. In addition, increased delinquencies or bankruptcies could cause credit costs associated with products including personal loans to exceed assumptions, which could affect the Group’s results.

C. The Groups holds various exchange-traded assets. Lower asset prices due to financial market turmoil could result in impairment or valuation losses on instruments including marketable securities, which could affect the Group’s results and finances.

2.Regulations

A. The Group’s business activities in Japan are subject to the Companies Act and other laws and regulations generally related to corporate management; to other laws and regulations including the Banking Act, Installment Sales Act, Insurance Business Act, Moneylending Control Act, Act on Special Measures Concerning the Claims Servicing Business, and Financial Instruments and Exchange Act; and to the oversight of financial authorities.We have established a management system to comply with these laws and regulations, but if the capital ratio conflicts with the level required by the financial authorities, the authorities may impose administrative measures including suspension all or part of the business.The Group’s global business activities are subject to the supervision of financial authorities and the laws and regulations of the countries and regions the Group serves. Such laws and regulations may be promulgated, changed, or abolished in the future, which could restrict the Group’s ability to provide goods and services and affect the Group’s results and finances.

B. The Group and its banking subsidiary are subject to capital adequacy regulations under the Banking Law. The Group and its banking subsidiary have systems to manage equity capital. However, the Financial Services Agency could suspend all or part of the Group’s businesses and impose administrative measures if the capital adequacy ratio of the Company or the Group should fall below the required level.

3.Intensified Competition

Competition could intensify in the industry in which the Group operates due to technological advances or the entry of new competitors. This could affect the Group’s businesses, results and finances if the Group is unable to adequately address intensified competition.

4.Natural Disasters such as Earthquakes and Floods and Terrorist activities

The Group conducts business in Japan and in Asian countries and regions such as Hong Kong, Thailand and Malaysia. Earthquakes, tsunami,typhoon, heavy rain,serious power outages, pandemic influenza, riots, terrorist activity, and other events in the countries and regions the Group serves could physically damage the Group’s stores and other facilities and its settlement infrastructure including ATMs, and could injure Group employees or customers. Such events could affect the Group’s results. In addition, such events could affect the Group’s results if they negatively impact the economies of the countries and regions the Group serves.Recently, there is a concern that the impact of the new coronavirus infection will reduce economic activities and change lifestyles, and that the impact will be prolonged.

5.Innuendo and Rumors

Relationships with customers, investors, regulatory agencies, communities, and the like are an important factor in the Group’s business. Innuendo and rumors that differ from reality concerning the Group and the financial industry and are disseminated by mass communication channels, word of mouth, Internet blogs and SNS (Social Networking Service) could damage trust in the Group and affect the Group’s results and finances.

6.Sudden Changes in Financial Markets and Economic Conditions

The Group funds its operations largely with deposits, borrowings from financial institutions, corporate bonds, commercial paper, and the securitization of receivables. The Group has thus diversified funding, but a decline in the credit rating or creditworthiness of the Group due to factors such as sudden changes in financial markets and economic conditions could affect the Group’s ability to fund operations.

7.Changes in Interest Rates

The Group’s banking business employs asset liability management (ALM) to appropriately manage interest rates and the maturities of assets and liabilities. Major changes in interest rates due to factors including market trends that exceed the ALM capabilities of the Group’s banking business or ineffective ALM could affect the Group’s results and finances.

8.Changes in Exchange Rates

The Group’s global businesses execute transactions in the currencies of the regions the Group serves. Changes in exchange rates could result in fluctuations in the value of the assets and liabilities of global business when translated into yen, which could affect the Group’s results and finances.

9.Deferred Tax Assets

The Group recognizes deferred tax assets in accordance with current accounting standards. Deferred tax assets may decrease if the Group determines some or all of its deferred tax assets may be difficult to recover due to changes in estimated future taxable income or tax system revisions including reduced corporate tax rates. This could affect the Group’s results, financial condition and capital adequacy ratio.

10.Systems Operations

Stable operation of systems that support mass data processing is one of the most important elements in the Group’s performance. Natural disasters, conflicts, terrorism, human error in system development and operation, software defects, hardware malfunctions, power outages, disconnection from communication networks, defects in the provision of other third party services, cyberattacks and sabotage could cause failures that suspend or delay system services and processes and result in information leakage. The Group has decentralized administrative centers and backbone servers to minimize the impact of disasters and failures. However, incidents that exceed assumptions could seriously impede business execution, require substantial investment for restoration, and reduce confidence in the Group, which could affect the Group’s results.

11.Administrative Risk

The Group’s business operations involve various kinds of administrative processes. We have established internal regulations and procedures for these administrative processes and educate employees. However, the Group could suffer administrative penalties or loss of trust if employees neglect to perform the prescribed administrative processes or cause losses for reasons including accidents or fraud, which could affect the Group’s results.

12.Personal Information Leakage

The Group has information on individuals that have business relationships with the Group and is a business entity handling personal information as stipulated by the Personal Information Protection Act. The Group assigns personnel responsible for the secure management of personal information to each department that handles such information, implements education and training for all employees, audits its information security programs, and has physical and technological polices for secure information management for workplaces and systems. In addition, the Group introduces systems that strengthens its response to attacks, raises awareness of information security among employees, and has measures to minimize damage in the event of infection. In addition, the Group rigorously manages and supervises subcontractors with access to personal information. However, deficiencies in the Group’s system for secure information management, personal information leakage, or unauthorized use of personal information could result in administrative guidance, directives or penalties under the Personal Information Protection Act. This could reduce trust in the Group and affect the Group’s results.

13.Violation of Laws and Regulations

The Group is circumspect about compliance with laws and regulations among officers and employees, but its measures may not always be effective. Violation of laws or regulations could result in administrative penalties or reduce trust in the Group, which could negatively affect the Group’s operations, results and finances.

14.Unsuccessful Strategies and Initiatives

The Group implements various strategies and initiatives. However, the Group may not be able to execute these strategies and initiatives, or their results may not be as initially planned. Strategies and initiatives may change as a result.

15.Expanded Scope of Operations

The Group is involved in various businesses including credit cards and banking. The Group also enters new businesses, structures alliances, invests capital and engages in M&A to address changing and diversifying customer needs and deregulation. The Group has established a system to appropriately manage the risks associated with these issues. However, the emergence of risk that exceeds assumptions may affect the Group’s operations, results, and finances.

16.Internal Control Structure

The Group considers compliance with laws and regulations and risk management to be management priorities, and has policies and procedures for its internal control structure. However, the human element and the rapidly changing business environment may cause dysfunction in the establishment, operation and monitoring of the internal control system, which may preclude appropriate risk management and affect the Group’s results.

17.Hiring Talented People

The Group’s operations require sophisticated expertise in a wide range of fields. Expenses may increase due to aggressive recruitment and ongoing training of executives and employees to provide high levels of service to customers. At the same time, inability to consistently hire talented people may affect the Group’s results and finances.

18.Cardholder Acquisition in the AEON Group

Cardholder acquisition is crucial because it is a source of operating income. The Group solicits new cardholders at shopping centers operated by the AEON Group. Currently, this is advantageous because it enables the Group to acquire new cardholders by taking advantage of its relationships as an AEON Group company. Issues including future store opening policies or store closures could affect cardholder acquisition and transactions volume.

19.Dividends Available to the Holding Company

The Company’s main income are largely dividends and management fees from subsidiaries directly owned by the Company. Under certain circumstances, the Companies Act and other regulations may limit the amount of dividends that a subsidiary may pay to the Company. In addition, the Company may be unable to pay dividends to its shareholders if subsidiaries do not generate sufficient profits and are therefore unable to pay dividends to the Company.

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