Risk Management

General Principles for Risk Management

SMFL recognizes the importance of risk management and identifies the locations and types of risks to be managed according to our strategic objectives and business activities. In accordance with the following general principles, SMFL conducts appropriate management according to the characteristics of each risk.

Group-level management
Various risks are managed at the SMFL Group level to avoid infringement of laws, regulations and other rules in accordance with the nature and importance of the business.
Management based on quantification
SMFL identifies the range of risks to be managed and quantitatively manages them according to the characteristics of the risks.
Ensuring consistency with business strategy
Risk management shall be consistent with business strategy.
System of checks
The risk management system shall be designed to check operations.
Response in case of emergency or serious situation
If risk materializes, SMFL takes necessary measures based on the assumption of situations and scenarios that have a significant impact on management and financial conditions.
Verification of the risk management system
The internal audit division examines our risk management system.

Risk Management System

An organizational chart showing the company's risk management structure. The Board of Directors is at the top, with the Executive Management Meetings positioned below it. Under the Executive Management Meetings are risk management departments (such as the Risk Management Department, General Affairs and Compliance Department, ICT Planning Department, etc.). Additionally, the risk management departments collaborate with each business division and corporate staff, the Audit Department, and various committees (such as the Risk Management Committee and the Investment and Loan Committee).

Risk Capital Management

In order to balance risks and returns while controlling risks within the limit of business vitality without placing undue emphasis on specific risks, we ascertain the amount of risk as much as possible, and set an upper limit on the size of acceptable risks as the "Total Risk Capital Limit."

SMFL's risk capital management

A diagram showing the risk management structure across the company's entire business. The overall business is divided into domestic leasing, real estate, transportation, international business, and environmental energy business, among others, with allocated capital assigned to each segment. These businesses are managed within the total risk capital limit (the amount of risk tolerated across the entire business), under which consolidated net assets (management resilience/allocable resources) are positioned. Additionally, a buffer is shown on the right, and the entire diagram visually represents the risk management structure of the company's overall business.

Risk Capital

We define "risk capital" as the approximate maximum loss exposure on owned assets, which is covered by capital.

A graph showing the company's risk capital. The horizontal axis represents loss and the vertical axis represents frequency. The graph has a peak in the center and is divided into the average loss portion on the right and the unexpected loss portion on the left. The average anticipated losses (provisions) are covered by revenue, while the losses that could occur in unexpected situations are covered by capital. This unexpected loss portion is referred to as risk capital.

Risk Management Methods

Risk Appetite Framework

SMFL has adopted the Risk Appetite Framework as our management structure in order to clarify the types and amounts of risk associated with earnings growth and to disseminate them throughout SMFL.

The Risk Appetite Framework is broadly divided into two components: Risk Appetite Statement and Risk Appetite Indicators (see figure below).

Using these documents and indicators, SMFL conducts Company-wide reviews of the risks and reflects them in our management strategy to promote appropriate risk-taking and to aim for business operations that balance soundness, profitability, and growth potential.

Structure of Risk Appetite Framework

A diagram illustrating the Risk Appetite Framework. On the left side, there is the environment and risk perception, listing economic environment, customer and market, regulations and laws, and company challenges. These factors influence the Risk Appetite Framework (RAF). The RAF is composed of the Risk Appetite Statement (a document expressing the attitude towards risk-taking and risk management) and Risk Appetite Indicators (metrics that quantitatively represent the level of risk to be taken and risk-return levels). It is supported by both business planning and management control, and the diagram also indicates dialogue with external stakeholders (such as shareholders) regarding the company's risk-taking.

Stress tests

SMFL is developing and enhancing stress testing methods to proactively verify the impact of unforeseen stress events such as large-scale deterioration in economic conditions or the collapse of a specific industrial sector on our credit portfolio and financial position including shareholders' equity, as well as cash flows. Stress tests enable us to maintain the soundness of our business even under stressed conditions, thereby allowing us to establish a system that ensures appropriate risk control under normal circumstances.

Risk Register

In anticipation of venturing into new business fields and coping with rapid shifts in the business environment, Risk Register is designed to enhance risk governance and each business units' risk ownership. Business units communicate with risk management departments to identify potential business risks. In the future, SMFL will establish a system where each business department identifies risks inherent in the operations through communication with the risk management department, evaluates them and verify the appropriateness of control measures, as well as reflect them in its business strategy.