Generative AI is an AI technology that allows machines to use learning models to study large amounts of data and gain the ability to generate creative content. Many generative AI applications such as ChatGPT have been launched in recent years. Due to the characteristics of the industry, digital transformation and innovation have always been critical for the digitalization of the financial industry. The use of generative AI in the financial industry mainly consists of financial analysis, customer services, marketing, and sales. The use of generative AI in the production process may create the following risks:

• If the use of generative AI requires a partnership and connection with an external entity, it may increase the risks of hacker attacks and the leak of personal data or sensitive data.
• Inaccurate information in the original data used for the machine learning of generative AI may create biased contents, which may lead to errors in business decisions and create financial or reputation risks for companies.
• Due to rapid innovations in FinTech such as generative AI, changes in supervisory regulations have become increasingly rigorous. As a result, financial institutions are more likely to receive fines for violations of regulations and it increases the cost of internal control and compliance.

Political and economic risks arising from geopolitical conflicts refer to the risks of political, social, or economic changes in the countries or regions with financial activities and investment operations. They include the political and economic conditions of individual countries, changes in governments’ monetary policies, or geopolitical conflicts between countries.

The trends to watch for in the coming year in the World Ahead 2023 published by the Economist included international political and economic conditions such as the RussoUkrainian War, economic recession, and the slowdown of China's economic growth:

• How the Russo-Ukrainian War plays out affects energy prices, inflation, interest rates, economic growth, and food shortages, and may exacerbate geopolitical conflicts. China may use the opportunity to take actions against Taiwan, and tensions between India and China may erupt.
• To ease inflationary pressures, central banks have raised interest rates and shrunk their balance sheets as major economies head into a recession.
• China's declining population and economic headwinds have slowed China's economic growth.

These political and economic events will have a dramatic impact on the financial markets of the major economies and will reduce corporate profits.

SinoPac Holdings employs two major strategies including "context management" and "AI and related digital technologies" to actively invest in the development of AI and new technologies. If SinoPac Holdings uses generative AI technologies in customer services, financial analysis, and other operations, the potential impacts are as follows:

• Introduce generative AI technology (AI-powered customer services) into customer services for customers to interact with AI-powered customer services. If the operations of AI-powered customer services require a partnership and connection with an external entity, it may increase the probability for customers’ personal data and sensitive data of the Company to be targeted by external hackers. It may lead to information security or personal data leaks, cause SinoPac Holdings to be penalized by the competent authority, and create material reputation risks or financial impact.
• The use of generative AI technologies in financial analysis facilitates the rapid collection and analysis of massive quantities of data. If there are biases or errors in the original data used for the machine learning of generative AI, it may create biased analysis results and impact SinoPac Holdings’ operations or finance.
• If SinoPac Holdings uses generative AI and other new technologies in operations, it will be required to comply with increasingly rigorous FinTech supervisory regulations or the guidance policies of the competent authority for AI technologies. The cost of internal control and compliance will increase as a result.

SinoPac Holdings’ main subsidiaries are Bank SinoPac and SinoPac Securities and their proportions of revenue were 77.74% and 20.07%, respectively. If a political or economic change occurs in countries or regions with financial activities and investment operations of SinoPac Holdings and its subsidiaries, the value of financial assets will fall and the default risks of loan customers will increase. These changes will affect the profitability of subsidiaries and impact the overall revenue of SinoPac Holdings.

• Bank SinoPac: Geopolitical conflicts may cause macroeconomic disruptions in the supply of raw materials and increase prices. They would increase the cost of investment and loan as well as manufacturing, and reduce the profitability of corporate customers. The loan repayment capacity of investment and loan clients would decrease and the probability of default will increase, which would ultimately increase the expected losses of the Bank. In addition, if a geopolitical conflict erupts in China, as the Bank's risk exposure in China accounts for 49%, any slowdown of the economic growth in China would impact the profit of the Bank.
• SinoPac Securities: The exacerbation of international political and economic tension would impact the securities and bond market. The Company's stress test results are as follows: The decline of the Taiwan Capitalization Weighted Stock Index or volatility in domestic or foreign financial markets may increase the default rate of brokerage and financing customers and create losses in NTD and foreign-currency financial assets in proprietary trading. Based on a simulation under a severe scenario, the estimated losses total approximately NT$1.4 billion.

• Introduce new information security protection technologies to strengthen information security mechanisms and personal data protection. Conduct regular social engineering exercises and emergency contingency plan exercises for personal data breaches.
• If the use of generative AI requires a partnership and connection with an external entity, the Company will design procedures for removing the identifiable information from the personal data transmission and continue to optimize the security of the system data transmission framework, review the accuracy of transmitted and received data, and ensure information security and personal data protection.
• When generative AI is used for operations, the Company must design and review procedures for verifying whether the original data used for the machine learning and carefully evaluate the application scenarios and system framework.
• Continue to monitor the risks in the use of new FinTech and changes in related supervisory regulations. Plan awareness campaigns in employee training programs to increase their awareness and reduce the operational, compliance, and reputation risks of SinoPac Holdings.

• Closely monitor international political and economic conditions and changes in financial markets. Review current market conditions when major changes occur and adjust asset portfolios in response to changes.
• In view of future developments of the industry and national political and economic developments, SinoPac Holdings has set the limits on loans and investments in the same industry, limits for loans and investments in individual countries, and regularly monitor the management of the limit.
• Strengthen post-loan monitoring and management mechanisms and actively monitor the operations of high-risk customers affected by the economy. Where necessary, increase the required collateral or recover loans upon expiry to reduce risks.
• Implement daily monitoring of the profit and loss of SinoPac Holdings and subsidiaries as well as their Value at risk (VaR) to senior executives to rigorously implement risk management response measures for early warning, limit exceeded, or stop loss.
• Simulate predicted scenarios for stress tests based on changes in economic conditions. Formulate response measures based on stress test results.