If EARTH's loans turn into NPLs, it may add 20bps to KTB's NPLs.
According to Maybank Kim Eng, EARTH defaulted on its B/Es and market worries it may pose NPL risk to banks.
"We believe KTB may be the biggest lender to EARTH and loans could be about THB3-4b (0.2% of KTB’s total loans), according to our estimate. In the worst case where loans turn into NPLs, it may add 20bps to KTB’s NPL number (now at 5.9%) and may hurt the bank’s FY earnings by about 10%."
Here's more from Maybank Kim Eng:
Coal company EARTH defaulted on its B/Es worth THB90m. Worse, the company expects it may not pay the upcoming B/Es in the next couple of months totalling THB540m, blaming that its overdraft account was suspended by a bank. This is unusual for a company that reported THB1.2b of cash in 1Q17. Market speculates this may lead to defaults of the company’s bank loans.
It’s unclear which bank had lent the most to EARTH. In EARTH’s 1Q17 financial report, the company had long-term bank loans of USD140m (THB4.2b) that went to buy coal and coal mines.
We see that in 2014 KTB said it lent about USD80m to EARTH to buy coal mines, hence we believe KTB is the biggest lender. EARTH also has a big portion of short-term loans, mostly Letters of Credit (L/C) type such as Trust Receipts and Packing Credit.
Even though the loans were big (about THB10b in 1Q17), these types of loans could be volatile and we leave them out from ourcalculations. Moreover, as these are very short term and for trading purposes, we believe these may not turn into NPL.
In the worst case, assuming that KTB expanded its credit line to EARTH and is the lender for the USD140m, KTB would need 100% provisions, which may hurt FY earnings by 10%.
But we note that it may be too soon to conclude that these loans will turn into NPLs. Several companies defaulted on B/Es early this year due to short-term liquidity problems and they managed to come back. We will monitor the situation closely to see whether EARTH eventually defaults on its bank loans.
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