SMFG Capital Ratio Information 2. Exposures by Asset Class (1) Corporate Exposures A. Corporate, Sovereign and Bank Exposures (A) Rating Procedures GLYPH<129> “Corporate, sovereign and bank exposures” includes credits to domestic and overseas commercial/industrial (C&I) companies,  individuals for business purposes (domestic only), sovereigns, public sector entities, and financial institutions. Business loans  such as apartment construction loans, and small and medium-sized enterprises (SME) loans with standardized screening process  (hereinafter referred to as “standardized SME loans”) are, in principle, included in “retail exposures.” However, credits of more  than ¥100 million are treated as corporate exposures in accordance with the Notification. GLYPH<129> An obligor is assigned an obligor grade by first assigning a financial grade using a financial strength grading model and data  obtained from the obligor’s financial statements. The financial grade is then adjusted taking into account the actual state of the  obligor’s balance sheet and qualitative factors to derive the obligor grade (for details, please refer to “Credit Risk Assessment  and Quantification” on page 35). Different rating series are used for domestic and overseas obligors — J1 ~ J10 for domestic  obligors and G1 ~ G10 for overseas obligors — as shown below due to differences in actual default rate levels and portfolios’ grade  distribution. Different Probability of Default (PD) values are applied also. GLYPH<129> In addition to the above basic rating procedure which builds on the financial grade assigned at the beginning, in some cases, the  obligor grade is assigned based on the parent company’s credit quality or credit ratings published by external rating agencies. The  Japanese government, local authorities and other public sector entities with special basis for existence and unconventional financial  statements are assigned obligor grades based on their attributes (for example, “local municipal corporations”), as the data on these  obligors are not suitable for conventional grading models. Further, credits to individuals for business purposes, business loans and  standardized SME loans are assigned obligor grades using grading models developed specifically for these exposures. GLYPH<129> PDs used for calculating credit risk-weighted assets are estimated based on the default experience for each grade and taking into  account the possibility of estimation errors. In addition to internal data, external data are used to estimate and validate PDs. The  definition of default is the definition stipulated in the Notification (an event that would lead to an exposure being classified as  “substandard loans,” “doubtful assets” or “bankrupt and quasi-bankrupt assets” occurring to the obligor). GLYPH<129> Loss given defaults (LGDs) used in the calculation of credit risk-weighted assets are estimated based on historical loss experience  of credits in default, taking into account the possibility of estimation errors. Obligor Grade Domestic  Corporate Overseas  Corporate Definition Borrower Category J1 G1 Very high certainty of debt repayment Normal Borrowers J2 G2 High certainty of debt repayment J3 G3 Satisfactory certainty of debt repayment J4 G4 Debt repayment is likely but this could change in cases of  significant changes in economic trends or business environment J5 G5 No problem with debt repayment over the short term, but not  satisfactory over the mid to long term and the situation could  change in cases of significant changes in economic trends or  business environment J6 G6 Currently no problem with debt repayment, but there are unstable  business and financial factors that could lead to debt repayment  problems J7 G7  Close monitoring is required due to problems in meeting loan  terms and conditions, sluggish/unstable business, or financial  problems Borrowers Requiring Caution J7R G7R Of which Substandard Borrowers Substandard Borrowers J8 G8  Currently not bankrupt, but experiencing business difficulties,  making insufficient progress in restructuring, and highly likely to  go bankrupt Potentially Bankrupt Borrowers J9 G9  Though not yet legally or formally bankrupt, has serious business  difficulties and rehabilitation is unlikely; thus, effectively bankrupt Effectively Bankrupt Borrowers J10 G10 Legally or formally bankrupt Bankrupt Borrowers SMFG  2011 182