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Morgan Stanley slashes RBL target in 11 days after raising it; stock tanks 7%

Shares of RBL Bank plunged 7 per cent on Monday, its biggest single-day fall since its listing more than two years ago, after Morgan Stanley downgraded its investment rating to underweight citing expensive valuations.

RBL Bank had rallied nearly 80 per cent since its listing on August 31, 2016, compared with the 23 per cent rise in the BSE Bankex during the same period. The stock ended atRs 469.60 on Monday, its lowest closing in seven months.

While downgrading the investment ratings on RBL Bank, Morgan Stanley said that the valuation at 2.8 times FY 19 estimated book with, 13 per cent FY20 estimated RoE, is not cheap and has much lower upside relative to large banks.

“In the near term, we expect increase in funding cost to be much higher than expected – this will weigh on margins and even growth outlook and as a result, we lower earnings estimates materially,” said a Morgan Stanley note.

RBL Bank snip 1

The sharp cut of nearly 33 per cent in the target price by Morgan Stanley within 11 days has surprised the investor community. Morgan Stanley, on October 10, had increased its target price from Rs 500 to Rs 675 when the stock was trading at Rs 599.

As rates move up, potential improvement in profitability could be delayed, affecting growth and the ability to raise capital at premium valuations, according to the investment bank.

“The bank is taking higher risk with increased lending to unsecured segments, which needs to be monitored,” said the note.
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