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

• Armed conflicts such as the continuous expansion of the Russo-Ukrainian War, the conflict between Israel and Hamas, and the blockade of the Red Sea by Houthi militants cause rising energy prices and food shortages and also affect inflation and economic growth.
• The economic sanctions imposed on Russia by Europe and the United States, the trade war between the United States and China, and China's economic sanctions and restrictions on Taiwan have impacted business operations, which in turn has led to a global economic recession and financial market turmoil.

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 74.89% and 22.69%, 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 and geoeconomic confrontation has caused global inflationary pressures and increased the prices of energy and raw materials, which affect the global economy and impact export-oriented corporate clients. They face the risks of increased costs and supply chain disruptions, which affect their operating profit and diminished the value of collaterals. It thus indirectly increases the credit risk, market risk, and country risk of the Banks' credit and investment portfolios. Bank SinoPac has no risk exposure in Russia and its risk exposure in China accounts for 41%. Any impact on the Chinese economy would impact the profitability of the Bank.
• SinoPac Securities: The international political and economic conflicts impact the securities and bond market. The Company and its customers may suffer severe losses in investment positions. In the event of an economic crisis, such as a financial turmoil, the Company's operations may be affected due to the impact on customers' financial arrangement and investment willingness. If severe scenario simulation is used, the estimated loss is approximately NT$2.6 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 affected industries to prevent over-concentration of assets. Pay close attention to the quality of assets with risk exposures, establish investment and financing limit for the same industry and the limits of overseas countries, and regularly monitor the management of the limits.
• Continue to monitor market development, adjust corresponding investment strategies based on market changes, and develop a long-term diversified asset allocation approach for investments.
• 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.
• 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.