First it was the bursting river banks, then the crop fields and now it seems the massive floods are making their mark on the financial district of the country. The banking system is often viewed as the heart pumping liquidity into the financial system.
Like an ominous dark cloud hovering over I.I Chundrigar Road, ratings for the five major banks have been downgraded.
And before the analyst community dismisses the change as a non-issue, the change in outlook came from Moodys Investor Services, the internationally respected agency. Long-term currency deposit ratings and bank financial strength ratings for the big 5 banks were notched down from stable to negative.
Though damage assessment hasn been completed, there is broad agreement that the economy is going to suffer significantly.
Economists predict a slowdown from the budgeted 4 percent, ranging from a low of no growth to a high mark of 2.5 percent. Either way, business activity is expected to slowdown. From a banks perspective, the ability of companies to repay their loans is likely to dwindle.
Take, for example, the textile industry, which incidentally has been mentioned in the note by Moodys. Nearly 14 percent of the lending from commercial banks is directed towards the sector. With losses from crop to production resulting from the flood, strains are likely on the banking sector.
"It doesn come as a shock to us, there are definite stresses in economy and today you are seeing a reflection of them in the banking sector," noted veteran fund manager, Nasim Beg.
Asset quality is expected to come under further strain in view of sticky inflation. Just yesterday, the Prime Minister alluded to the risks of inflation touching 20 percent. Soaring inflation generally results in a higher discount rate, translating into higher borrowing costs for consumers.
The central bank is expected to raise the prime lending rate by a further 100 basis points, according to the economist of a large international bank.
The cherry on the top is the burgeoning government borrowing that has consistently cannibalised the banking sector in the last couple of years. In the aftermath of the floods, when reconstruction costs start piling up, there are risks to the governments solvency, as pointed out recently by the finance minister.
"Foreign investors consider rating changes when investing in the capital market," said banking analyst Hamza Marath of KASB Securities. Knowing that the bulk of buying at the local bourse is led by the offshore investors these days, the tremor could have a ripple effect onto the stock market.
At this point, major banks are well-capitalized. They are likely to weather the floods with adequate provisioning. But the Pakistani economy needs firefighting. It may be on the brink of a storm but drastic measures must be taken today if tomorrow is to be secured.