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Relationship Banking. Year-on-Year Change in Outstanding Loan Balance to SMEs. Total Balance of Loans to SMEs in Japan by Type of Institution

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Pe rf or m an ce H ig hl ig ht s Th e Sh ok o Ch uk in Ba nk An nu al Re po rt 20 06

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T he Sh ok o C hu ki n B an k N et w or k Fi na nc ia l H ig hl ig ht s M es sa ge fr om th e Pr es id en t O ur Pr ofi le an d Fu nc ti on s M an ag em en t Po lic y To pi cs O ut lin e of O pe ra ti on s D ir ec to rs an d A ud it or s C or po ra te D at a Sy st em s to En su re So un d B us in es s O pe ra ti on s O rg an iz at io n

This section provides details on the specific results of the Shoko Chukin Bank’s initiatives

Relationship Banking

The Bank’s nationwide employees are deeply familiar with SMEs because of day-to-day relationships. P Accurately grasp and analyze the state of a firm’s finances and cash flow;

P Evaluate a firm’s business operations and technical capabilities, and assess its future potential;

P Comprehend management thinking and concerns and offer advice on business development and improving management; and P Suggest new business opportunities and financing methods suited to each company.

the shoko chukin Bank’s basic business model is to provide a high-value-added service focused on problem-solving that responds to the management needs of smes in a detailed and thoughtful manner, and secure an appropriate return.

-12 -10 -8 -6 -4 -2 0 2

Year-on-Year Change in Outstanding Loan Balance to SMEs

(%)

’95 ’96 ’97 ’98 ’99 ’00 ’01 ’02 ’03

(Fiscal year / quarterly basis)’04 ’05 Notes: 1. Commercial banks include domestic banks, shinkin banks and credit cooperatives.

2. Data for domestic banks consists of loans to small, medium-sized and middle-market enterprises. For shinkin banks it consists of loans to businesses, and for credit cooperatives, total loans. 3. Data for domestic banks in the fourth quarter of fiscal 2005 excludes credit cooperatives. Source: Bank of Japan, Bank of Japan Statistics, and others

Commercial banks Shaded areas

denote recessions denote recessionsShaded areas

The Shoko Chukin Bank

Total Balance of Loans to SMEs

in Japan by Type of Institution

(As of March 31, 2005)

Credit Cooperatives 3.6%

Japan Finance Corporation for Small and Medium Enterprise 3.1%

National Life Finance Corporation 3.8% Banks 69.9% The Shoko Chukin Bank 3.7% Shinkin Banks 15.9%

* Banks include city banks, regional banks, second-tier regional banks and trust banks.

Sources: Bank of Japan, Financial and Economic

Statistics Monthly, and SHOKO

RESEARCH INSTITUTE, Shoko Kinyu, and others

The Bank provides a flexible service tailored to the needs of companies. Through everyday transactions with

SMEs we gain a deep understanding of the current status of each firm’s business—not just its financial aspects

but the details of operations and technology, management skills and opinions, and other aspects—and help

companies to maintain a stable financial position over the long term, without being preoccupied by temporary

downturns in the economy.

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Pe rfo rm an ce H igh lig ht s M an ag em en t Po lic y Th e Sho ko Ch uk in Ba nk An nu al Rep ort 20 06

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T he Sh ok o C hu kin B an k N et w or k Fin an cia l H igh lig ht s M es sa ge fro m th e Pr es id en t O ur Pr ofi le an d Fu nc tio ns To pic s O ut lin e of O pe ra tio ns D ire ct or s an d A ud ito rs C or po ra te D at a Sy ste m s to En su re So un d B us in es s O pe ra tio ns O rg an iza tio n

The Nationwide Business Foundation for SME Financing

L the shoko chukin Bank’s Business Base

P Consists of over 27,000 affiliated SME cooperatives nationwide (total membership of 3 million companies) P High transaction rate with SMEs, core companies of local regions

P Around ¥10 trillion in loans extended to approximately 80,000 SMEs nationwide

L number of loan recipient companies

L loan rate (%) by company size in each region

Paid-in

capital ¥50 millionLess than ¥100 millionLess than ¥300 millionLess than ¥300 millionMore than Total

Hokkaido/Tohoku 3.9 21.0 24.7 16.6 4.5 Kanto 3.6 22.0 21.0 11.7 4.4 Hokuriku/Chubu 4.1 23.2 23.0 17.1 4.7 Kinki 5.5 23.2 25.8 14.6 6.3 Chugoku/Shikoku 5.2 26.5 29.5 19.9 5.9 Kyushu/Okinawa 5.0 22.3 24.5 17.6 5.6 All Japan 4.3 22.7 23.1 14.0 5.0

* The number of companies per region is taken from the 2004 Establishment and

Enterprise Census (Ministry of Internal Affairs and Communications)

* Number of the Shoko Chukin Bank clients is as of March 31, 2006. 40,000

80,000

(Total recipients) (New recipients)

2,500 10,000 FY2005 FY2004 FY2003 FY2002

No. of recipients at end

of period (left-hand scale) No. of new recipients (right-hand scale) 7,606

8,899

9,584

9,127

 Number of Loan Recipient Companies

75,243 76,352 77,858 79,001

Region

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Pe rf or m an ce H ig hl ig ht s Th e Sh ok o Ch uk in Ba nk An nu al Re po rt 20 06

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T he Sh ok o C hu ki n B an k N et w or k Fi na H ig M es sa ge fr om th e Pr es id en t O ur Pr ofi le an d Fu nc ti on s M an ag em en t Po lic y To pi cs O ut lin e of O pe ra ti on s D ir ec to rs an d A ud it or s C or po ra te D at a Sy st em s to En su re So un d B us in es s O pe ra ti on s O rg an iz at io n

The Shoko Chukin Bank utilizes its position as a comprehensive financial institution with discerning judgment

acquired through long experience in dealing with SMEs to provide timely and appropriate services.

sUPPorting tHe cHallenge of start-UP sUPPorting tHe cHallenge of innoVation 0 1,100 FY2005 FY2004 FY2003 (Loans) (¥100 million) 0 120

No. of loans (left-hand scale) Amount (right-hand scale) 18

53

115

 Financing through the New Business

Incubation Funding

92 176 1,047

Toho Processing’s Oyama Plant (Oyama-shi, Tochigi Prefecture)

The K Filter VOC adsorptive recovery equipment at the Oyama Plant

Patients are able to select from a range of options using a bedside terminal

case study: Vitas Co., Ltd. (Bunkyo-ku, Tokyo) is a venture company aiming to improve patient amenities and the care environment inside hospitals. The Bank was impressed by the novel idea of the business, and made financing available for the company in October 2005 through our New Business Incubation Funding. We also provided advice and support for the company’s application for approval to launch a new business in collaboration with other SMEs in other business areas. The Bank supports SMEs that are newly formed or venturing into new businesses with compre-hensive financing services that include backing through an investment syndicates, and various types of public support programs.

support for companies Working to control Voc emissions: In August 2005 the Bank developed a financial product in cooperation with the Gravure Cooperative Association of Japan to provide financial support for voluntary efforts to control emissions of volatile organic compounds (VOCs). The first case was financing for Toho Processing Inc. (Chiyoda-ku, Tokyo), in March 2006. Control of VOCs requires the installation of

combustion treatment devices and other types of equipment, placing a large financial burden on the company. The Bank helps

companies to efficiently address environmental issues, and sup-port the social contributions of SMEs that take on the challenge of innovation.

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Pe rfo rm an ce H igh lig ht s M an ag em en t Po lic y Th e Sho ko Ch uk in Ba nk An nu al Rep ort 20 06

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T he Sh ok o C hu kin B an k N et w or k Fin an cia l H igh lig ht s M es sa ge fro m th e Pr es id en t O ur Pr ofi le an d Fu nc tio ns To pic s O ut lin e of O pe ra tio ns D ire ct or s an d A ud ito rs C or po ra te D at a Sy ste m s to En su re So un d B us in es s O pe ra tio ns O rg an iza tio n sUPPorting tHe cHallenge of start-UP reVitali- Zation fUlfilling tHe role of a safetY net for smes 0 100 FY2005 FY2004 FY2003 (Loans) (¥100 million) 0 100

No. of loans (left-hand scale) Amount (right-hand scale) 54

45

98

Financing for Business Revitalization Loans

58 49 73

A newly installed soy sauce production machine The long-established sake brewery founded in the Meiji Period (1868–1912)

case study: In October 2005 the Bank and the Niigata Credit Union helped Imayotsukasa Shuzo Co., Ltd. (Niigata-shi, Niigata Prefecture) secure ¥34 million in exit financing.

Imayotsukasa, with the support of an alcohol wholesale company headquartered in Osaka, is making efforts to improve production efficiency and implement a revitalization plan to build a direct sales structure centered on retailers in the Kanto Koshinetsu region, with the idea of consolidating its product lineup to high-quality sake, and marketing it to consumers throughout Japan. We feel that support for the recovery of a sake brewer—the representative local industry

of Niigata—as well as enhancing the creditworthiness of the company and contributing to its revival, is a worthy undertaking.

case study: The Bank introduced Disaster Recovery Funding, a public support program to help companies recover from disasters, to Yamazaki Brewing Co., Ltd., (Ojiya-shi, Niigata Prefecture) a producer of miso and soy sauce whose production facilities were severely damaged during the Niigata Chuetsu Earthquake. The Bank, along with the local financial institution that is the compa-ny’s main bank, provided funds necessary for restoration, realizing the recovery in investment of local industry.

The Bank sets up special consultation desks in business offices, through which it is able to provide financial counseling in a timely manner in the wake of typhoons, earthquakes and other natural disasters, or in response to sudden shifts in the business environment, such as the appre-ciation of crude oil prices. These offices allow the Bank to assist SMEs affected by such events in

a sympathetic, courteous and speedy manner.

M special consultation Desks set Up in fiscal 2005

Event Established Places Established

Closure of Maruiimai Inc.’s Otaru and Tomakomai stores

July

2005 Branch offices in Sapporo, Hakodate, Obihiro, Kushiro and Asahikawa Damage from Typhoon

No. 14 September 2005

All business offices in Tokyo, Yamaguchi, Kochi, Miyazaki, and Kagoshima prefec-tures (total of 18 branch offices) Rise in crude oil prices September 2005 99 branch offices nationwide Damage from heavy

snowfall in January 2006 January 2006 Business offices in Niigata and Nagano prefectures (total of 5 branch offices)

Providing a Range of Services Tailored to SME Growth Stages

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Pe rf or m an ce H ig hl ig ht s Th e Sh ok o Ch uk in Ba nk An nu al Re po rt 20 06

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T he Sh ok o C hu ki n B an k N et w or k Fi na H ig M es sa ge fr om th e Pr es id en t O ur Pr ofi le an d Fu nc ti on s M an ag em en t Po lic y To pi cs O ut lin e of O pe ra ti on s D ir ec to rs an d A ud it or s C or po ra te D at a Sy st em s to En su re So un d B us in es s O pe ra ti on s O rg an iz at io n

The Shoko Chukin Bank is developing new financing methods that are not overly dependent on real estate

collateral or personal guarantees, with the aim of greater facilitation and diversification of financing for SMEs.

We actively promote debt/debt swaps (DDS), syndicated loans and other financing methods in cooperation and

coordination with regional financial institutions.

M overview of new financing methods

No. of Loans

Method Start Date Accumulated Amount (¥100 million)

Private placed bonds Apr. 1993 2,692 2,878

Securitization of trade receivables Feb. 2000 92 4,784

Syndicated loans Mar. 2000 (Participation amount total) 945(Arrangement deals) 62 2,652890

DIP finance July 2001 207 216

Local and regional government agencies CLOs Mar. 2002 755 260

CDS June 2003 (Notional principal total) 3 383

DDS Mar. 2004 15 45 ABL May 2005 7 11 0 360 FY2005 FY2004 FY2003 3 184 15 262 41 355 0 70 FY2005 FY2004 FY2003 55 63 69 0 500 1,000 0 2,000

Loans as lead arranger (left-hand scale) Participation amount (right-hand scale) Loans as participant (left-hand scale) Amount as lead arranger (right-hand scale)

481 783 931 47 271 510

No. of transactions (left-hand scale) Amount (right-hand scale) 869

1,271

1,539

Note: Amount as lead arranger is the cumulative total of the Shoko Chukin Bank and other banks. Participation amount is the contract amount where another bank is the lead arranger.

Overview of Syndicated Loans

Transactions Using a Securitization

of Trade Receivables Scheme

(Loans) (¥100 million) (Transactions) (¥100 million) 0 360 FY2005 FY2004 FY2003 3 184 15 262 41 355 0 70 FY2005 FY2004 FY2003 55 63 69 0 500 1,000 0 2,000

Loans as lead arranger (left-hand scale) Participation amount (right-hand scale) Loans as participant (left-hand scale) Amount as lead arranger (right-hand scale)

481 783 931 47 271 510

No. of transactions (left-hand scale) Amount (right-hand scale) 869

1,271

1,539

Note: Amount as lead arranger is the cumulative total of the Shoko Chukin Bank and other banks. Participation amount is the contract amount where another bank is the lead arranger.

Overview of Syndicated Loans

Transactions Using a Securitization

of Trade Receivables Scheme

(Loans) (¥100 million)

(Transactions) (¥100 million)

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Pe rfo rm an ce H igh lig ht s M an ag em en t Po lic y Th e Sho ko Ch uk in Ba nk An nu al Rep ort 20 06

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T he Sh ok o C hu kin B an k N et w or k Fin an cia l H igh lig ht s M es sa ge fro m th e Pr es id en t O ur Pr ofi le an d Fu nc tio ns To pic s O ut lin e of O pe ra tio ns D ire ct or s an d A ud ito rs C or po ra te D at a Sy ste m s to En su re So un d B us in es s O pe ra tio ns O rg an iza tio n DDS (Debt/Debt Swap) DDS is an advanced technique used to rebuild the finances of SMEs based on management improvement plans that are reasonable and have a high probability of success. Under such schemes, a portion of debt held by a financial institution is swapped for capital subordinated loans. In March 2004, the Bank became the first financial institution in Japan to execute a DDS scheme in line with the requirements of the

Supple-ment to the Financial Inspection Manual: Treatment of Classifica-tions Regarding Credits to Small and Medium-sized Enterprises.

ABL (Asset-Based Lending) ABL focuses on the business lifecycle process in which inventory is sold become trade receivables, which are then recovered. Under such a scheme the combined value of inventory and trade receivables is considered the collateral, and set as the upper limit for financing.

Purchaser

Client company

Financial institution Pledge or management account

Collateral transfer Collateral transfer Cash deposits (management account) Trade receivables (receivables) Inventory (movable assets) Business transaction Recovery Sale

Designated deposit of proceeds from sale (into controlled account)

Report regularly on collateral information Execute financing Collateral acquisition as a single unit GLOSSARY OF TERMS Assets (market value) 100 Debt 150 (200 ) Excess debt 50 (100 ) DDS 50 Borrowings 50

Conversion to a capital subordinated loan (The DDS becomes de facto capital) Execute DDS 50

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Pe rf or m an ce H ig hl ig ht s Th e Sh ok o Ch uk in Ba nk An nu al Re po rt 20 06

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T he Sh ok o C hu ki n B an k N et w or k Fi na H ig M es sa ge fr om th e Pr es id en t O ur Pr ofi le an d Fu nc ti on s M an ag em en t Po lic y To pi cs O ut lin e of O pe ra ti on s D ir ec to rs an d A ud it or s C or po ra te D at a Sy st em s to En su re So un d B us in es s O pe ra ti on s O rg an iz at io n

Cooperation with External Organizations Nation- wide to Respond to the Diverse Needs of SMEs

The Shoko Chukin Bank collaborates and cooperates with local and regional government agencies, industry

organizations, regional financial institutions and other bodies in its efforts to stimulate local economies

and industries.

M overview of support in cooperation with Various organizations

Support in cooperation with regional federations of small business associations

The Bank supports the formation of new businesses and ventures into new business fields through cooperative arrangements by working together with regional federations of small business associa-tions to provide business association support loans for newly formed cooperative associaassocia-tions, and loans for newly formed joint-enterprise associations.

Support in cooperation with chambers of commerce and industry

The Bank is making efforts to revitalize and stimulate local regions through such measures as establishing a Committee for Revitalization and Stimulation of Regional Areas together with the Japan Chamber of Commerce and Industry, and launching a Chamber of Commerce Alliance Loan in cooperation with chambers of commerce and industry in each region.

Support in cooperation with

industry associations The Bank is working in cooperation with the Japan Trucking Association to provide funds for replacing vehicles subject to emissions standards under the Vehicle NOx/PM Control Law. Support in cooperation with

universities, etc. The Bank provides financing and information for SMEs working to commercialize R&D achievements of universities and other institutions, supporting the development of regional industries.

SME

Federation of Small Business Associations

• Chambers of Commerce and Industry

• Societies of Commerce and Industry

• Shopping District Promotion Cooperatives and Federations

Industry Groups Regional Financial Institutions Universities, others New Coordination Strategy Committees (Organization for Small & Medium Enterprises and

Regional Innovation) • SME Revitalization Support

Councils

• Resolution and Collection Corporation

• Industrial Revitalization Corporation of Japan

Chukin Kai, Youth Kai

The Shoko Chukin

Bank

Respond

to needs Local and Regional

Government Agencies

M overview of cooperation efforts

All-Japan Youth Kai: Cross-industrial exchange organization composed 5,000 young entrepreneurs throughout Japan

Strategy committees established in 9 blocks nationwide

Agreements concluded with 6 institutions

Number of business cooperation agreements with financial institu-tions 351

Japan Trucking Association, others Chambers of commerce and industry 522 Societies of commerce and industry 2,776 Shopping District Promotion

Cooperatives and Federations 47 47 Small Business Associations

(Approximately 40,000 subordinate associations) Organizational support Cooperative financing Cooperative financing Information exchange Cooperative financing Information exchange Policy-based lending Information exchange Partner for revitalization support Information exchange

Support new alliances Information exchange Support cooperation

between industry, academic institutions and government agencies

Information exchange Risk sharing partner

Promote new financing methods

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Pe rfo rm an ce H igh lig ht s M an ag em en t Po lic y Th e Sho ko Ch uk in Ba nk An nu al Rep ort 20 06

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T he Sh ok o C hu kin B an k N et w or k Fin an cia l H igh lig ht s M es sa ge fro m th e Pr es id en t O ur Pr ofi le an d Fu nc tio ns To pic s O ut lin e of O pe ra tio ns D ire ct or s an d A ud ito rs C or po ra te D at a Sy ste m s to En su re So un d B us in es s O pe ra tio ns O rg an iza tio n

Cooperation with External Organizations Nation- wide to Respond to the Diverse Needs of SMEs

in December 2004, the shoko chukin Bank formulated a comprehensive support strategy for regional revitalization and economic stimulation. We established numerous policy themes in line with the strategies of local and regional government agencies and other bodies, to provide support for regional smes in terms of both financing and information.

April 2005 to March 2006 Policy themes: 298

Financing cases: 3,449 cases for a total of ¥204.0 billion

Hokuriku

No. of policy themes: 13 • Stimulation of the

manufac-turing industry (Toyama) • Support for local industries

(lodging, textile manufactur-ing), (Kanazawa), etc.

Koshinetsu

No. of policy themes: 18 • Regional revitalization

following the Niigata Chuetsu Earthquake (Nagaoka) • Financing support for

busi-nesses operating in specific business zone (wine zone), (Kofu), etc.

Hokkaido

No. of policy themes: 7 • Contribution to the Hokkaido invigoration program (Sapporo) • Zero emissions Hokkaido

(environmental preservation efforts), (Asahikawa), etc. tohoku

No. of policy themes: 27 • Crystal Valley concept

(concentration of flat panel display FPD manufacturers) (Aomori, Hachinohe) • Support for businesses

offering Aizu slow food (traditional and local cuisine), (Fukushima), etc.

Kita-Kanto

No. of policy themes: 28 • Support for “one company,

one technology” firms selected by Gunma Prefecture (Maebashi) • Support for Ibaraki

Prefec-ture industrial stimulation (manufacturing technology support project), (Mito), etc. Kinki

No. of policy themes: 62 • Cooperation with the

Eco-Kyoto 21 environmental strategies of Kyoto Prefec-ture (Kyoto)

• Support for Osaka manufac-turing technology, (Senba), etc.

tokyo

No. of policy themes: 23 • Support for invigoration of

Ginza District retail shops and commercial areas (Business Division) • Support for invigoration of

Kanda and Jimbocho, (Kanda), etc. minami-Kanto No. of policy themes: 11 • Support for Kawasaki

entre-preneur auditions, (Kawasaki), etc. chugoku

No. of policy themes: 28 • Concentrated industry (roof

tiles) stimulation support project (Matsue)

• Enhancing competitiveness of automobile-related industries (Hiroshima), etc.

Kyushu/okinawa No. of policy themes: 38 • Support for the regional

employment expansion project through development of new lifestyle industries (Kitakyushu)

• Support for overseas business development for prefectural businesses, (Kagoshima), etc.

shikoku

No. of policy themes: 12 • Support for the regional

business international sales route development support project (Takamatsu) • Support for the founding of

new leading industries in the Ehime prefectural economy of the 21st century, (Matsuyama), etc.

tokai

No. of policy themes: 31 • Ceramics (Mino ware)

production area revitalization project (Gifu)

• Stimulation of the regional economy through support for recycling-related busi-nesses, (Yokkaichi), etc.

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