This worst case scenario could hurt Thai banks' profits by up to 29%

Krung Thai Bank will be most impacted.

Thai coal company EARTH has defaulted on its trade finance loans. Maybank Kim Eng says this will push up NPL/credit cost of the creditor banks in the upcoming 2Q17 results. The maximum negative impact on earnings for KTB/KBANK/BAY would be THB0.7/1.3/0.1 per share, respectively.

Here's more from Maybank Kim Eng:

EARTH filed to the SET that it has defaulted on its trade finance loans from a bank totaling THB887m. The situation is worse than we had expected (previously we believed only long-term loans, not trade finance loans, would turn into NPLs). The default automatically converts the loans into NPLs, which will be negative for 2Q17 results of creditor banks (Krung Thai Bank, Kasikornbank, Bank of Ayudhya).

What could be the worst for banks?
The worst case scenario for the above three banks would be 1) EARTH defaults on all types of bank loans and 2) Similar to the SSI case (SSI TB, Non Rated) for SCB/KTB/TISCO, the BOT may force banks to do a 100% provision without considering collateral value due to the complexity and uncertainty regarding the collateral. Lastly, that the banks will have to write new provisions for this case, and will not use their current excess loan-loss reserves.

In the unlikely event that all three of the above scenarios happen simultaneously, KTB/KBANK/BAY will see a THB12/3.8/1.2b increase in provision expenses, which would reduce FY17 after-tax profit by 29/7/4%, respectively.

KTB likely to be most impacted
We think this specific case should not affect the banks’ profitability in the medium term. KTB is likely to be the most impacted due to its higher exposure to EARTH. We recommend investors to remain cautious on KTB until 2Q17 results (when the detail of the exposure should become clearer).