HIROSHIMA BANK ANNUAL REPORT 2016

Transcription

1 HIROSHIMA BANK ANNUAL REPORT 2016

2 Profile Founded in November 1878, The Hiroshima Bank, Ltd. (the Bank ) is a regional financial institution headquartered in Hiroshima Prefecture, operating primarily in Hiroshima and the three neighboring prefectures of Okayama, Yamaguchi and Ehime. In addition to 167 branches and offices in Japan, the Bank has representative offices in Shanghai, Bangkok and Singapore covering the entire area of East and Southeast Asia. Taking advantage of its extensive network, the Bank is providing comprehensive financial services including deposit taking, lending, money transfers, foreign currency exchange, and trustee services, along with investment trust sales and life insurance policies and other commercial banking activities. Management Policy Management Vision Building a reliable Hiroshima Bank Group united through trusting relations with the regional community Code of Conduct The Hiroshima Bank Group shall rigorously implement sound management based on the following code of conduct: 1. Work in step with regional communities to actively contribute to their development 2. Strive to enhance customer satisfaction and peace of mind 3. Continuously enhance the Bank s corporate value 4. Create a cheerful, rewarding workplace 5. Exercise a high level of compliance Financial Results (As of March 31, 2016, non-consolidated) Balance of deposits + NCD Balance of loans Net Income Profit attributable to owners of the parent Capital Adequacy Ratio Hiroshima Bank Head Office 7,024.5 billion 5,267.2 billion 30.0 billion 31.4 billion (Consolidated) 11.33% (Non-Consolidated) 11.08% Corporate Data (As of March 31, 2016, non-consolidated) Established November 1878 Common Stock 54,573 million Employees 3,380 Head Office Office 3-8, Kamiya-cho 1-chome, Naka-ku, Hiroshima , Japan 151 domestic branches, 16 sub-branches, and 3 overseas representative offices (Shanghai, Bangkok, Singapore) Business Operations (As of March 31, 2016) Hiroshima Bank Banking operations Other operations Head Office and branches: 151 Sub-branches: 16 Consolidated subsidiaries: 6 Hirogin Business Support Co., Ltd. (Consolidated financial reporting, printing, and publishing operations) Hirogin Mortgage Service Co., Ltd. (Real estate collateral assessment operations) Shimanami Servicer Co., Ltd. (Administration and recovery of receivable debts) Hirogin Wealth Management Co., Ltd. (Insurance agency operations) Hirogin Guarantee Co., Ltd. (Credit guarantee operations) Hirogin Card Service Co., Ltd. (Credit card operations) Equity-method affiliates: 3 Hirogin Utsumiya Securities Co., Ltd. (Financial instruments brokerage operations) Hirogin Lease Co., Ltd. (Lease operations) Hirogin Auto Lease Co., Ltd. (Automobile lease operations) Unconsolidated subsidiary: 1 HB Asset Funding Corporation (Factoring operations) Contents 1 Hiroshima Bank s Network 2 Profile of Hiroshima Prefecture 3 Message from the President 4 Summary of Business Performance in FY Mid-Term Management Plan 13 CSR Initiatives 14 Consolidated Five-Year Financial Highlights 15 Corporate Governance 22 Risk Management System 25 Financial Section 56 Corporate Information

3 Hiroshima Bank s Network (As of March 31, 2016) JAPAN The leading regional financial institution in the Chugoku and Shikoku regions Branch network Shimane: 1 Okayama: 10 Hyogo: 2 Branches and Offices: 167 Yamaguchi: 7 Hiroshima: 136 Tokyo: 1 Osaka: 1 Aichi: 1 Fukuoka: 2 Ehime: 6 ATM network The Bank s own ATMs: 806 ATMs of other banks with mutual transaction fee waivers: Approx. 4,100 Affiliated Japan Post Bank ATMs: Approx. 27,200 Affiliated convenience store ATMs: Approx. 47,400 OVERSEAS Covering the entire area of East Asia and Southeast Asia Associated Bank Standard Chartered Bank (Covers 16 countries in Asia) Associated Banks (China) Bank of China Bank of Communications Bank of Dalian Associated Bank The Hongkong and Shanghai Banking Corporation (Covers countries and regions with over 80 Group bases) Associated Bank (Taiwan) CTBC Financial Holding Shanghai Representative Office Countries Overseen Mainland China (including Hong Kong and Macao), Taiwan Business Partner (China) Wuxi Municipal People s Government Associated Banks (Korea) Korea Exchange Bank Korea Development Bank Associated Bank (Vietnam) Joint Stock Commercial Bank for Foreign Trade of Vietnam Joint Stock Commercial Bank for Investment and Development of Vietnam (BIDV) Bangkok Representative Office Countries Overseen Thailand, Vietnam, Cambodia, Myanmar, Laos Associated Bank Bank of America, N.A. (Covers Mexico) Alliance Partners (Mexico) State of Aguascalientes State of Jalisco Associated Bank (Indonesia) PT. Bank Negara Indonesia (Persero) Tbk Associated Bank (Philippines) Metropolitan Bank and Trust Company Associated Banks (Thailand) Bangkok Bank Kasikorn Bank Associated Bank (India) State Bank of India Associated Bank Singapore Representative Office Countries Overseen Singapore, Malaysia, Indonesia, Brunei, Philippines, India, Bangladesh Credit Agricole Corporate & Investment Bank (Covers Thailand, Vietnam and India) Associated Bank (Brazil) Banco do Brasil HIROSHIMA BANK ANNUAL REPORT

4 Profile of Hiroshima Prefecture Characteristics of Hiroshima Prefecture Hiroshima Prefecture, where the Bank s operations are based, has an outstanding economic advantage within the Chugoku- Shikoku region of Japan, about 2.3% share on most major national economic indicators, and ranking roughly 11th among the 47 prefectures. Hiroshima Prefecture is a market with high growth potential. National ranking and share Hiroshima Prefecture compared with national averages Regional Land area Population Actual figure National National ranking share As of 8,479 2 km 11/ /10 2,869 thousand 12/ /1 Prefectural income per capita Land area Population Economic Financial No. of households Nominal gross prefectural product Total number of offices, factories, etc. Shipments of manufactured goods, etc. Wholesale and retail sales Prefectural income per capita Balance of deposits Balance of loans 1,281 thousand 11/ / trillion yen 12/ FY thousand 11/ trillion yen 10/ trillion yen 9/ ,004 thousand yen 8/47 FY trillion yen 11/ / trillion yen 11/ /12 Wholesale and retail sales Shipments of manufactured goods, etc Total number of offices, factories, etc National average - Hiroshima Prefecture Note: 100 = national average Source: Hirogin Research Institute 50 0 No. of households Nominal gross prefectural product Hiroshima Bank s Operating Base The four local prefectures (Hiroshima, Okayama, Yamaguchi, and Ehime) served by Hiroshima Bank make up an economic base that rivals Japan s three metropolitan areas in terms of population and number of business establishments. Even by international comparison, the GDP of this economic base exceeds that of Denmark. Hiroshima Bank s operating base Nominal GDP of the four local prefectures Ranking Prefecture Name Nominal GDP (Trillions of yen) Share in Japan (%) Relative GDP (Hiroshima = 100) 3. Yamaguchi 2. Okayama 1. Hiroshima Hiroshima City 4. Ehime Total Hiroshima Okayama Yamaguchi Ehime ( trillion) Morocco Hungary Hiroshima New Zealand Philippines Hong Kong Singapore Malaysia Denmark Total South Africa Austria Norway Sweden 2 HIROSHIMA BANK ANNUAL REPORT 2016

5 Message from the President Building a reliable Hiroshima Bank Group united through trusting relations with the regional community Koji Ikeda, President The economy of Hiroshima Prefecture has been strong, centered on the automotive industry, but also in exports and production activity. Moreover, business conditions overall have tracked a gradual recovery path due to improving employment and income levels, consumer spending that is holding firm, and signs of a rebound in housing investment. In these circumstances, Hiroshima Bank started Mid-Term Management Plan 2015 Create the Future with Local Communities in fiscal Looking ahead, the outlook for conditions surrounding financial institutions shows that we are entering a phase more difficult than ever due to numerous factors including a declining population and number of business establishments, as well as a further decrease of market interest rates due to the negative interest rate policy introduced by the Bank of Japan. However, Hiroshima Bank polished its front-line capabilities by transcending preconceived notions, and demonstrated a funding flow function in the region, together with striving to provide sophisticated financial services. Specifically, we are working to create jobs in the region through such initiatives as the promotion of viability assessments, the support of business creation and venture funds, and the activation of the tourism industry in the Setouchi region, and we continue to contribute to the realization of local revitalization. Moreover, in addition to strengthening initiatives directed at furthering the careers of women and promoting diversity by recruiting specialized human resources, the Bank is working to deliver a new level of added value in a variety of services, including through initiatives to create new businesses in collaboration with other business formats. The Bank also strives to build business models for the realization of sustained growth. In addition, we are striving to protect our customers through such initiatives as the strengthening of cybersecurity management, formulation of the appropriate approach to the My Number Act (the Social Benefits and Tax Number Act), and prevention of billing fraud. At the same time, we are making ongoing efforts towards inculcating high ethical standards, including ensuring that each and every officer and employee of the Bank exercises compliance. Furthermore, to become a banking group that is indispensable to the region, we will move proactively in every facet of corporate social responsibility including social contribution and environmental protection, thereby further raising our value to society. Through these efforts, we will make the Hiroshima Bank Group a high-value, reliable banking group that is trusted by all of its stakeholders. We look forward to your continued support and cooperation as we endeavor to reach our goals. HIROSHIMA BANK ANNUAL REPORT

6 Summary of Business Performance in FY2015 Characteristics of Hiroshima Prefecture In FY2015, the fiscal year ended March 31, 2016, Hiroshima Bank saw an increase in gains on securities and a decrease in credit costs offset a minor decline in core banking profit. As a result, ordinary profit increased 5.4 billion year on year to 45.1 billion and net income increased 6.1 billion to 30.0 billion on a non-consolidated basis. This marked the first time for the Bank s net income to reach the 30.0 billion level after increasing for seven consecutive years. On a consolidated basis, the Hiroshima Bank Group s profit attributable to owners of the parent also increased 4.8 billion year on year to 31.4 billion, for the seventh consecutive year. With revenues and profits up on both a non-consolidated and consolidated basis in FY2015, the Group renewed its record high on profits for the third consecutive year. [Non-Consolidated] ( billion) Result for FY2015 YoY change (Change rate ) Operating income ( 2.6 %) Net interest income 74.7 (0.8) Net fees and commissions income 18.8 (1.1) Core gross banking profit 93.5 (1.9) ( (1.9)%) Expenses 53.7 (0.5) Core banking profit 39.8 (1.4) ( (3.3)%) Gains/Losses on securities Credit costs 1.7 (0.9) Ordinary profit (13.6 %) Net income (25.6 %) [Consolidated] Operating income ( 4.3 %) Ordinary profit (17.1 %) Profit attributable to owners of the parent (18.0 %) Earnings Core gross banking profit Core banking profit Net income ( billion) billion ( (1.9) billion) ( billion) billion ( (1.4) billion) ( billion) billion (+ 6.1 billion) FY2013 FY2014 FY FY2013 FY2014 FY FY2013 FY2014 FY2015 Net fees and commissions income Net interest income 4 HIROSHIMA BANK ANNUAL REPORT 2016

7 Loans (As of March 31) After an increase in both corporate and individual loans, the Bank s balance of loans stood at 5,267.2 billion at the end of FY2015. The balance of corporate loans reached 3,925.3 billion in the wake of the Bank promoting loans based on the evaluation of customer business potential. Of this, the balance of loans to SMEs was 2,194.1 billion. The Bank s balance of individual loans reached 1,341.9 billion following the promotion of both housing and consumer loans. ROE As an indicator of business efficiency, Hiroshima Bank s return on equity (ROE) was 7.11%. This was higher than the target of 6% or higher in the Bank s current mid-term management plan. Loan balance Loans to SMEs Net assets / ROE 5,267.2 billion ( billion) ( billion) 6,000 4,000 4, , , , , , ,194.1 billion ( billion) ( billion) 2,500 2,000 1,500 1, , ,194.1 ( billion) (%) % (+0.81 point) ,000 1, , , , FY2013 FY2014 FY Corporate loans, etc. Individual loans (Left) (Right) Net assets ROE Deposits After conducting banking activities closely tied to local communities, the Bank s balance of deposits and negotiable certificates of deposit (NCD) stood at 7,024.5 billion at the end of FY2015, reaching the 7,000 billion level for the first time. As a result of efforts to strengthen retail banking services providing customers with life stage advice, the Bank s balance of individual custody deposits reached 5,347.9 billion. (As of March 31) (As of March 31) Capital adequacy ratio Hiroshima Bank s consolidated capital adequacy ratio stood at 11.33% at the end of FY2015, a sufficient level substantially higher than Japan s domestic standard. This was attributable to the accumulation of retained earnings and other net assets offsetting an increase in risk assets accompanying growth in the balance of loans. Deposits and NCD Individual custody assets Consolidated capital adequacy ratio 7,024.5 billion ( billion) 6, , , , , , ,491.2 ( billion) 7,000 1, ,250 4, ,500 ( billion) 6,000 4,000 5,347.9 billion ( billion) 5, , , , , ,187.4 (%) % (+0.18 point) ,750 2, Domestic standard (Regulatory floor) Corporate deposits Individual deposits Public and finance institution deposits Financial products brokerage Public bonds Investment trust sales Insurance Individual deposits HIROSHIMA BANK ANNUAL REPORT

8 Mid-Term Management Plan Progress of Mid-Term Management Plan 2015 Create the Future with Local Communities Mid-Term Management Plan 2015 Create the Future with Local Communities (FY2015 FY2017) Three Pillars of the Mid- Term Management Plan 1. Fulfill the financial intermediary function to generate a virtuous circle where we can sustainably grow with our local customers 2. Create new added value to improve corporate value 3. Active commitment to regional revitalization Targets for FY2017 Profit attributable to owners of the parent 27.0 billion Consolidated capital adequacy ratio 11% or more ROE 6% or more Core Over Head Ratio High 50s% [Our Goal with the Three Pillars of the Mid-Term Management Plan] Expansion of customer base Provide financial products and services truly beneficial to customers 3. Active commitment to regional revitalization 2. Create new added value 1. Fulfill the financial intermediary function Generating a virtuous circle Benefit from the fruits of growth in both customers and the local economy (securing stable profit) Growth of customers Growth of local economy (10 years later) Aim to become a bank with total assets of 10 trillion Expansion in both quality and volume Expansion of business fields Strategies in the Mid-Term Management Plan Under the mid-term management plan, we are working to further enhance profitability and our management foundation pivots on six strategies. Main Points in Each Strategy 1. Marketing Strategy 2. Human Resource Strategy 3. ALM/Securities Strategy 4. Operational Streaming Strategy 5. IT Strategy 6. Group Strategy ( i ) Enhance approaches to the personal market (ii) Enhance consulting sales (iii) Active efforts for regional development (iv) Realize channel cooperation (omni-channel retailing) ( i ) Nurture human resources that contribute to the development of local communities by creating and providing new value (ii) Develop a corporate culture in which a diverse range of people can play active roles ( i ) Enhance profitability through alliances with asset management companies (ii) Enhance profitability of the portfolio through proper risk-taking (iii) Appropriate and effective practice of ALM ( i ) Drastic streamlining in preparation for an increase in the amount of activity (ii) Streamline the administrative sector ( i ) Study next generation systems while enhancing and nurturing IT personnel responsible for the future (ii) Active utilization of IT to realize various strategies and measures ( i ) Maximize synergy effects by enhancing Group governance (ii) Expand business fields (challenge new businesses) Steady increase of internal reserves through profitability enhancement Enhance the management foundation 6 HIROSHIMA BANK ANNUAL REPORT 2016

9 Enhancement of Approaches to the Personal Market» Promotion of Consumer Loans Given the prevailing low-interest environment, we are focused on further promoting consumer loans, which offer relatively high returns. We were able to significantly increase both the balance of consumer loans and the amount of consumer loans executed by working to strengthen promotion of card loans, for example through television ads, and by making inroads into the loan counter market. In the fiscal 2016, we will work to further promote consumer loans by introducing new loan products such as loans with an online application process and card loans that do not require a repayment account. Trend of average balance of consumer loans (avg.) Trend of the amount of consumer loans executed ( billion) 80 Annualized +9.0% ( billion) 15 Annualized +24.7% FY2012 FY2013 FY2014 FY FY2012 FY2013 FY2014 FY2015 Card loans Loans for specified use Others» Promotion of Card Business Hiroshima Bank handled the e-money premium coupon card HIROCA, the first of its kind with a local focus. Through its compatibility with the e-money format, HIROCA returned a premium to people in the region at a rate of 25%, which exceeded the 20% premium rate for transactions with the paper version of the coupons. Moreover, HIROCA performed strongly in stimulating local consumer activity during the usage period from November 2015 to February 2016, with a transaction amount of 3.98 billion and a usage rate of 99.9%. We began handling HIROCA as a form of local e-money in April 2016, and as we work to promote HIROCA, we will also expand platforms for personal transactions to continue enhancing convenience for customers while contributing to the vitality of the local economy. Outline of the e-money premium coupon card Outline of local e-money HIROCA (from April 11, 2016) As HIROCA becomes more widespread as a form of local e-money, deposits are expected to flow into Hiroshima Bank as its settlement counter and associated transactions are also expected to increase. (As of March 31, 2016) Can be used at approx. 650 affiliated stores Stores in shopping streets, etc. Name Charge limit Premium amount Premium coupon card HIROCA* *Usage period as a premium coupon card (Until February 28, 2016) 50,000 (per person) 25% of the charge amount; 20% by other local governments Covering the entirety of Hiroshima Prefecture HIROSHIMA BANK ANNUAL REPORT

10 » Expansion of Customer Base in Collaboration with Insurance Companies As we work to enhance consulting sales based on customers life stages, we are steadily increasing individual custody assets by developing new channels in collaboration with insurance companies, in addition to conventional sales channels. With regard to premium-level insurance, sales volume increased through alliances with American Family Life Assurance Company of Columbus (Aflac) and Zurich Insurance Group Ltd. (Zurich). In our nine-month results for fiscal 2015, we ranked third among first-tier regional banks. Going forward, we will continue to strengthen these collaborations and work to broaden our customer base, which is vital for raising the individual custody asset balance. Promotion of premium-level insurance in collaboration with Aflac and Zurich Established insurance call center (from April 2015) Aflac Collaboration Use of direct mail (from September 2014) Hiroshima Bank Trend in the number of sales of premium-level insurance* (Sales) 60,000 48,000 36,000 24,000 The number of our sales in FY2015 (for 9 months) ranked third among first-tier regional banks. 16,655 24,562 32, ,836 sales (annualized +42.5%) 46,407 Zurich Collaboration Hiroshima Bank 12,000 0 * Accumulated number of sales (As of March 31) Enhancement of Consulting Sales» Promotion of Business for Elderly Clients As the population continues to age, customer needs related to asset and business inheritance have increased each year, and contracts in our business for elderly clients have increased substantially. In order to meet the needs of these clients, in January 2016, we established a new calendar-year gift trust called the <HIROGIN> OMOI TSUZUKU Trust a first for a regional bank. We successfully concluded over 100 contracts in approximately three months after its launch. Based on this performance when handled exclusively by the headquarters, we began making the trust available at all of our branches. Going forward, we intend to continue to broadly develop products matched to customer needs, identify underlying needs and further expand the business for elderly clients. Trend of contracts for elderly clients (inheritance-related) (Contracts) 1,200 1, Sept Invested in Asahi Trust Co., Ltd. Jan Business alliance with Yamada Escrow and Trust Co., Ltd. First for a regional bank June 2014 Began handling <HIROGIN> Asset Trust, a specified money trust with a special agreement Sept Began handling <HIROGIN> KAZOKU TSUNAGU Trust (testamentary substitute trust) 1, Products matched to customer needs First case for a regional bank Jan Started handling the calendar-year gift trust <HIROGIN> OMOI TSUZUKU Trust [Product handled exclusively by Private Banking Business Promoting Office (headquarters)] Apr Began handling the <HIROGIN> OMOI TSUZUKU Trust at all branches to identify underlying needs Relationship between the number of applications for financial products and custody asset balance at Hiroshima Bank The number of applications for financial products by wealthy people with the largest amount of retail assets is relatively small at present Enough room to explore underlying needs Major target customers (in their 80s) FY2011 FY2012 FY2013 FY2014 FY2015 Property succession Estate liquidation Calendar-year gift trust Testamentary trust Testamentary substitute trust Main prospective customers for the sales of financial products Age Average deposited assets per person Number of financial products acquired by age group Wealthy prospective customers with the largest amount of retail assets in their 80s (Age) 8 HIROSHIMA BANK ANNUAL REPORT 2016

11 Active Efforts for Regional Development One of the three main pillars in Hiroshima Bank s mid-term management plan is active commitment to regional revitalization, and last fiscal year we provided recommendations and proposals at advisory council meetings held by local public organizations to help them formulate Regional Comprehensive Strategies, and we actively provided solutions for the development of work, people and communities. Director and staff in charge of regional revitalization were appointed in April 2016 to further strengthen our system for engaging in this process in an integrated manner while drawing on our existing relationships with local public organizations. Under this structure, we will actively promote measures developed mainly by local public organizations and initiatives for regional revitalization, based on the Regional Comprehensive Strategies.» Regional Issues Population decline and aging, declining birthrates, and regional economic contraction» Hiroshima Bank s Vision for Regional Revitalization Develop communities with appeal as places to live Develop work: Raise productivity Develop communities and people: Develop people-friendly communities» Regional Revitalization Overview and Hiroshima Bank Initiatives April 2015 April 2016 Promote National Comprehensive Strategies (5 years) Formulate Regional Comprehensive Strategies (5 years) Execute Regional Comprehensive Strategies Coordination with local public organizations Participated and made recommendations and proposals as a member of advisory committees for 20 of 24 local public organizations in Hiroshima Prefecture Hirogin Research Institute contracted to formulate population vision as regional comprehensive strategy (Onomichi, Seracho) Concluded comprehensive partnership agreements with Hiroshima, Kure, Fuchu (August 2015) and Fukuyama (April 2016) Began dispatching personnel to Hiroshima and Fukuyama (October 2015) Measures New Provided startup support loans Performed feasibility studies to help local companies grow Director responsible for regional revitalization (executive in charge of Public Services Business Division) Established regional revitalization support loans Hiroshima Bank Development of work Handled premium coupons (paper based) (19 local public organizations) Handled premium coupon cards (HIROCA) New Formed support organization for tourism DMO project Coordinated with Setouchi Brand Promotion Association Strengthened promotion system Staff in charge of regional revitalization (members of Public Services Business Division) Development of communities and people Measures Partnerships related to looking after elderly residents (Fukuyama, Onomichi, Kumanocho, Sakacho, Seracho) Created support plan for vacant houses ( Family Loan ) Established childcare facilities in Hiroshima Prefecture government offices Conducted a childcare support campaign (childcare support loans, time deposits with preferential interest rates for babies) Mission of Staff in Charge of Regional Revitalization 1) Promotion and management 2) Creation of new business models 3) Effective information dissemination, etc. HIROSHIMA BANK ANNUAL REPORT

12 » Promotion of Feasibility Studies Feasibility studies involve banks and other institutions performing qualitative analysis of external conditions and internal information to appropriately evaluate customers businesses and growth potential, without relying excessively on financial data or collateral and guarantees. The studies are used to provide both financing and consulting services. In conducting feasibility studies, Hiroshima Bank closely examines customers business characteristics, growth potential and other elements; shares information on issues; and provides consulting for solutions. These activities contribute to revitalizing the regional economy. In fiscal 2015, we conducted feasibility studies based on qualitative analysis for 634 client companies. Feasibility Study Process <Qualitative Analysis> 1 Analysis of external conditions (competitive environment) 2 Analysis of internal information (hearing survey on 25 items) <Sales Capability> Sales capability Customer base capability Distribution Chart <Creation Capability> Products and services Production capability Corporate Group Chart Technological development capability <Organizational Capability> Organizational management capability Business Model Overview <Flow> Hearing survey Understand the situation Feedback to management Share issues with management Collect information (share with branches) Promote loans Provide solutions FY2015: Feasibility studies based on qualitative analysis performed for 634 clients (35% of the mid-term management plan (FY2015 FY2017) target of 1,800 clients) Effects of feasibility studies based on qualitative analysis (Number of loans executed) Quantitative aspects FY2013 FY2014 Value of loans executed (right) ( billion) FY2015 Number of loans (left) Qualitative aspects Fosters trust Deepens understanding of the actual situation Differentiates from other banks Identifies customers needs Further improves connoisseurship» Revitalization of the Setouchi Tourism Industry Foreign tourists to Hiroshima Prefecture and tourism-related consumption in the seven prefectures of the Setouchi region have been increasing each year, creating an appealing regional market. A tourism industry revitalization plan for the Setouchi region has been created and the Promotion System for the Setouchi Brand (Setouchi DMO) has been developed through an alliance with government agencies, tourism-related companies, and financial institutions. Amid these developments, in April 2016, Hiroshima Bank, along with financial institutions in the Setouchi region and corporations inside and outside the region, invested in Setouchi Brand Corporation, which provides dedicated management support and financing for tourism-related companies. We also teamed up with financial institutions in the Setouchi region and Development Bank of Japan to form the Setouchi Tourism Revitalization Fund. Going forward, we intend to accelerate these initiatives for making Setouchi a region of choice for large numbers of tourists and business operators. Trend in the number of foreign tourists to Hiroshima Prefecture and the amount of tourism consumption in the seven prefectures of the Setouchi region ( billion) 2,400 2,000 1,600 1, Appealing Market 487 1, , ,456.4 HIROSHIMA BANK ANNUAL REPORT ,047 1,776.7 (Thousands) 1, FY2012 FY2013 FY2014 FY2015 Total tourism consumption in the seven Setouchi prefectures (Hiroshima, Okayama, Yamaguchi, Ehime, Tokushima, Kagawa, Hyogo) (left) Foreign tourists to Hiroshima Prefecture (right) (Source: Japan Tourism Agency; 2014 tourism consumption figures for Hiroshima Prefecture have not been released by the Japan Tourism Agency, so they are figures disclosed on Hiroshima Prefecture s website.) 1, Promotion System for the Setouchi Brand (Setouchi DMO* 1 ) National government (Cabinet Office, Japan Tourism Agency), Prefectures (7 Setouchi Prefectures) Coordination Promotion Setouchi Tourism Promotion Committee* 2 Customers Setouchi DMO Coordination Setouchi Brand Corporation Management support, funds provision Tourism-related companies Coordination Financial Institutions (Executive office: Hiroshima Bank) Management support, funds provision *1 Organizations that conduct integrated strategy formation, surveys, marketing, product development, promotion, etc. Primarily seen in the U.S. and Europe. *2 General incorporated association with the objective of establishing the Setouchi brand with representatives from the private sector and directors from the seven prefectures in the Setouchi region.

13 Fintech Initiatives As a part of initiatives to Create new added value to improve corporate value as stated in our mid-term management plan in December 2015, we began full-fledged activities in financial technology through a partnership with the fintech venture freee Co., Ltd. Also, in June 2016, we formed a business alliance with TKC Corporation, and we are working jointly to strengthen the management capabilities of small-and medium-sized companies utilizing fintech services developed by TKC. Going forward, we plan to combine our own products and services with advanced information technology in order to further strengthen new financial services. * Fintech is an abbreviation for financial technology; it refers to financial services that utilize information technology. Main Fintech Fields Remittance and settlement (mobile, online settlement, etc.) Financing (P2P lending, cloud financing, etc.) Personal asset management (household bookkeeping functions, etc.) Management and administrative support (cloud accounting, etc.) Asset management support (robo-advisor, etc.) Virtual currencies Security (biometric authentication, etc.) December 2015, alliance with freee Co., Ltd. one of Japan s leading fintech companies June 2016, business alliance with TKC Corporation Enhance customer convenience Expand client businesses Revitalize regional economies Realization of Channel Coordination (Omni-Channel) Hiroshima Bank is working to increase contact with customers by strengthening coordination between face-to-face and nonface-to-face channels. In fiscal 2015, we worked to communicate with customers one-to-one, meaning we provided information to individual customers through our website, personal Internet banking service, and ATMs, as well as conducting telemarketing and other initiatives utilizing customer responses on personal Internet banking and ATMs. In addition to these measures, we are also planning to strengthen one-to-one sales utilizing points of contact with customers, to increase contact with customers utilizing new channels specifically social media and smartphone apps, and to enhance channel functions utilizing fintech and other approaches. Going forward, we will actively develop these measures to be a bank that allows customers to perform transactions or have consultations using their preferred channel whenever and wherever they want. Implemented Measures One-to-one communications ➀ on our website and personal Internet banking (began July 2015) ➁ One-to-one communications on ATMs (began Jan. 2016) Grasp customer needs at ➂ branches (CRM) and utilize in sales (began July 2015) Telemarketing utilizing customer responses on personal Internet ➃ banking, ATMs, etc. (began Sept. 2015) <Measures Being Planned> More sophisticated call center Strengthen channel coordination Strengthen one-to-one sales using customer contact points Strengthen customer contact utilizing new channels (social media, smartphone apps) Acquire individual middle-mass class customers by realizing channel coordination Smartphone app Social media Direct mail/ Website, personal Internet banking Website views, Internet banking transactions Measure ➀ Communication Information provision Measure ➃ Approach Telemarketing Response Customers Inquiries Toll-free dial Call center Deposit/ withdrawal transactions Replies Transactions/ procedures Measure ➁ ATMs Consulting/transactions Measure ➂ Approach Approach Telephone banking Branches (CRM) Disseminate information in anticipation of needs Mutually complementary information Acquire behavioral information More advanced, mutually complementary marketing Headquarters (marketing system) Launched from July 2015 Strategic use of information Attribute information (age, gender, etc.) Transaction information (deposits, withdrawals, card usage, etc.) Behavioral information (access logs, customer response, etc.) Provide product/service information expected by customers via the optimal channel and timing HIROSHIMA BANK ANNUAL REPORT

14 Development of a Corporate Culture in which a Diverse Range of People Can Play Active Roles To enable female employees to demonstrate their abilities to the maximum extent, Hiroshima Bank is constantly working to enhance its organizational capabilities by actively holding career support seminars and promoting women to managerial and supervisory positions. We have over 100 female managers and supervisory officers as of March 31, We are also actively recruiting lawyers, IT personnel and other mid-career personnel in specialized fields in an effort to diversify our talent pool even further. Moreover, beginning in July of this year, we will reform our personnel system and establish a new career track for highly specialized personnel. This will strengthen our system for accommodating specialized personnel and contribute to the construction of career paths that allow individual employees to demonstrate their abilities. Trend in number of female managers and supervisory officers (Persons) Target number of female managers/ supervisory officers in mid-term management plan: Female supervisory officers Female managers (As of March 31) Active hiring of career-track personnel FY Number hired Active hiring of lawyers, IT FY personnel and other mid-career FY personnel in specialized fields Reform personnel system for highly specialized personnel Establish S*-course (from July 2016) * Special Reform objectives Create career paths that enable highly specialized personnel to further enhance specialization in their respective fields and demonstrate their abilities [S-course specialized qualifications] Professional field Required qualifications IT Pass applied IT tech professional exam Acquire financial planner level 1 certification and any of the following: Registered real estate broker Private banking Certified small/medium-sized Strengthen system for enterprise consultant accommodating specialized Securities analyst personnel Market-related Securities analyst Enhancement of Profitability in Collaboration with Asset Management Companies Regarding the conditions surrounding fund management by banks, we believe that the importance of forward-looking market analysis and flexible asset allocation is going to steadily increase due to declining market interest rates and the influx of cash into loan and asset markets following monetary easing. Also, with respect to customer asset management, we expect even higher demand for financial products and services tailored to diversifying life plans and life stages with continued population aging, lower birthrates, and an uncertain social insurance outlook. Given these conditions, Hiroshima Bank has invested in All Nippon Asset Management Co., Ltd. and has temporarily assigned employees there in order to acquire advanced expertise in fund management, develop unique products in line with customer needs, and further develop market division personnel. We will continue to work to secure stable profits in fund management through further strengthening this alliance. Bank: Fund management aspect Customers: Asset management aspect External environment (background) Declining market interest rates Declining financial institution investment returns Influx of cash to loan and asset markets due to monetary easing Concerns about increasing market volatility Increasing importance of forward-looking market analysis, flexible asset allocation, etc. Aging population and declining birthrates Increase in customers with safety orientation (seniors) Uncertain social insurance outlook Increasing asset formation needs for retirement Increasing demand for financial products/ services in line with diversifying life plans and life cycles Objectives Investment in, and employee assignment to, All Nippon Asset Management Co., Ltd. Company name All Nippon Asset Management Co., Ltd. (location: Tokyo) Date established December 2015 Seven regional banks, Development Bank of Japan Inc. Investors Seven regional banks, including Hiroshima Bank, Tokai Tokyo Financial including Hiroshima Bank Tokai Tokyo Financial Holdings, Inc. Holdings, Inc., and Development Bank of Japan Inc. Paid-in capital 1.25 billion ( 100 million investment from Hiroshima Bank) Asset management, product development, Investment, employee assignment Investment Business Investment management, investment consulting and brokerage services, specialized personnel development type-2 financial product transactions, etc. Start of operations April 2016 All Nippon Asset Management Co., Ltd. 12 HIROSHIMA BANK ANNUAL REPORT 2016

15 CSR Initiatives Apart from contributing to the sustainable growth of the regional economy through business operations, Hiroshima Bank Group is actively involved in a wide variety of CSR activities for making social contributions and protecting the environment. Supporting the Local Economy and Industries (Economy) 1. Business activities 1) Compliance 2) Corporate governance 3) IR activities 4) Dividends and tax payments 2. Banking services 1) Provide high-added-value financial products, services and solutions 2) Facilitate funding Promoting CSR Management Nurturing Local Culture and People (Society) 1. Contribute to the community 1) Promotion of local culture 2) Support for local sports 3) Support for financial education 4) Social welfare activities 5) Participation in community activities 2. Respect for human rights 1) Mental health support 2) Support for childcare and elderly care Protecting the Local Environment (Environment) 1. Reducing environmental impact 1) Environmental protection activities 2) Offering environmentally aware products 3) Forest protection activities 4) Social awareness-raising Contributing to the Growth of the Regional Community and Customers, Enhancing Corporate Value We seek to secure the sincere trust of all our stakeholders, including customers, the regional community, shareholders, the market and our employees. Creating a virtuous cycle for the entire region Enhancing the Hirogin Group s Sustainability Supporting Hiroshima s Professional Sports Teams and Musicians Sponsoring games played by the Hiroshima Toyo Carp baseball team Sponsoring the Hirogin Tomorrow Concert performed by the Hiroshima Symphony Orchestra Sponsoring games played by the Sanfrecce Hiroshima soccer team Support of the Arts and Culture The Hiroshima Museum of Art The Hiroshima Museum of Art Overview The Hiroshima Museum of Art was established in November 1978 by Hiroshima Bank in commemoration of the 100th anniversary of its foundation, as we move through history together with the region. We hope that the museum can offer spiritual repose to the people of Hiroshima, the city reduced to ruins by the atomic bomb on August 6, To this end, we have created a sanctuary of fragrant beauty around the themes of love and healing. We pray that it will also bring repose to the victims of the bomb that has led to today s Hiroshima, and peace to Hiroshima City. The Collection The approximately 300 paintings in the possession of the museum comprise modern European works centered on the French impressionists from the mid-nineteenth century, Romantics up to the Paris School, and modern Japanese works from the Meiji Period onward, including traditionalstyle Japanese paintings. The modern European works are permanently exhibited in the Main Hall. Address: 3-2 Motomachi, Naka-ku, Hiroshima City , Japan Opening Hours: 9:00 a.m. 5:00 p.m. (Last entry 4:30) Closed: Mondays except during special exhibitions (or the following day if a public holiday falls on Monday) and December 29 January 2 Note: The museum is sometimes closed temporarily to change exhibitions. HIROSHIMA BANK ANNUAL REPORT

16 Consolidated Five-Year Financial Highlights THE HIROSHIMA BANK, LTD. AND CONSOLIDATED SUBSIDIARIES Millions of U.S. dollars Years ended March For the year: Total income 130, , , , ,368 $ 1,192 Total expenses 102, , ,074 89,707 87, Income before income taxes and others 27,591 31,844 38,742 41,647 47, Profit attributable to owners of the parent 13,862 17,405 22,882 26,563 31, At year-end: Total liabilities and net assets 6,650,677 7,061,647 7,205,576 7,917,039 8,200,925 $72,781 Deposits 5,888,327 6,131,651 6,351,566 6,793,662 7,013,719 62,245 Loans and bills discounted 4,467,066 4,645,163 4,804,602 5,102,855 5,267,812 46,750 Securities 1,813,177 2,060,603 1,986,123 2,135,659 1,995,792 17,712 Total net assets 327, , , , ,919 3,975 Per share data: Yen U.S. dollars Cash dividends $ 0.10 Profit attributable to owners of the parent Total net assets Ratio: Capital adequacy ratio 11.79% 11.94% 12.06% 11.15% 11.33% Note: The U.S. dollar amounts represent translation of Japanese yen at the exchange rate of to U.S. $1.00 on March 31, Total income Profit attributable to owners of the parent Capital ratio ( billion) 200 ( billion) 40 (%) (Years ended March 31) Note: Figures are rounded down to the nearest full number (Years ended March 31) 0 (Basel II) (Basel III) (Years ended March 31) 14 HIROSHIMA BANK ANNUAL REPORT 2016

17 Corporate Governance Basic Approach to corporate governance The Bank s management policy is to improve management efficiency and transparency to receive high evaluation from and build unshakable bonds of trust with our stakeholders, including both customers and shareholders. To attain this goal, we have positioned more stringent corporate governance as a top management priority, and are working to raise standards through a range of measures. 1. Outline of corporate governance structure The Bank has adopted an Audit & Supervisory Board system as part of its efforts to strengthen corporate governance for the following reasons and purposes: For responding promptly and accurately to changes in the management environment and ensuring the appropriateness of the Bank s business operations, it is important to have a system in which internal Bank directors, who have wealth of expert knowledge and experience in the banking business and bank management and a deep understanding of the operation and execution of the Bank s business, oversee as members of the Board of Directors the management s decision-making and the execution of duties by the other directors; Having the Audit & Supervisory Board whose members, including external Audit & Supervisory Board members, audit the execution of duties by the directors is effective and serves as a management monitoring function; and The highly independent external directors and external Audit & Supervisory Board members provide their supervising and auditing functions in a fair and objective manner from a neutral perspective and give appropriate suggestions and advice on the execution of the duties by the directors and on the status of the operation of internal controls, thereby ensuring an adequate management supervisory system. The Bank s Board of Directors consists of 10 members, including 3 external directors, as of June 29, The Board convenes once a month, in principle, and is responsible for making management decisions and overseeing business execution. The Bank has established the Management Board under the Board of Directors as a body for discussing and determining important matters relating to overall management based on the basic policy determined by the Board of Directors. The members of the Committee are the Chairman, President and directors in charge of the respective divisions, and the Committee convenes once a week, in principle. In addition, the Bank has established the Directors Loan Evaluation Board as a body to discuss and determine important loan projects based on the basic policy formulated by the Board of Directors. The members of the Committee are the Chairman, President, Senior Managing Directors, and directors in charge of the respective divisions, and the Committee convenes once a week, in principle. The Articles of Incorporation of the Bank prescribe that the number of directors of the Bank does not exceed 15 and that terms of office are for one year, to clarify management responsibility and build a management framework to respond rapidly to changes in the management environment. The Bank has also introduced an executive officer system. Under the supervision of the Board of Directors, the system has duties executed by the President and Chief Division Officers, as well as Chief Area Officers. The decisionmaking functions related to important management items that directors should carry out and duties that directors and executive officers conduct in each role are divided, thereby appropriately ensuring operations and enhancing sustainable corporate values. The external directors receive reports on the results of internal audits, auditors audits, and accounting audits as well as reports on the state of internal control from the division in charge of internal control during meetings of the Board of Directors as part of their roles of providing management supervisory functions in a fair and objective manner from a neutral and external perspective. In particular, the external directors receive detailed explanations of the agendas for the meetings of the Board of Directors and reporting materials in advance from the divisions in charge of internal audit and internal control, respectively, and provide appropriate suggestions and advice during such advanced explanation or meetings of the Board of Directors, thereby endeavoring to raise the effectiveness of their management supervisory functions. In addition, for the purpose of conducting investigations, research, or discussions and coordination about specific matters, the Bank has established various other committees, including the Long-term Management Planning Committee, the Sales Strategy Committee, the ALM Strategy Committee, the IT Strategy Committee, the Comprehensive Risk Management Committee, the Strategic Equity Holdings Verification Committee, the Compliance Committee, the Award Reprimand Committee and the HIROSHIMA BANK ANNUAL REPORT