PFC and REC shares fell by up to 3% on August 20, 2026, after Morgan Stanley downgraded both stocks to 'Equal-weight'. The brokerage reduced its price targets, citing a sharp slowdown in Q1 FY27 loan growth that lagged behind broader sector trends. The move highlights investor concerns regarding the companies' ability to expand their loan books without sacrificing profit margins in a competitive lending environment.
Shares of state-run power financiers Power Finance Corporation (PFC) and REC Limited experienced a decline of up to 3% during intraday trading on August 20, 2026. The sell-off followed a rating downgrade by Morgan Stanley, which changed its stance on both companies from 'Overweight' to 'Equal-weight' and slashed its price targets.
For PFC, the brokerage reduced its target price to ₹410, while for REC, the target was set at ₹360. These revisions follow a significant discrepancy between the lenders' recent performance and the broader credit trends in the Indian financial system.
The Loan Growth Disconnect
The downgrade is largely driven by a cooling in loan growth reported in the first quarter of the 2027 fiscal year. PFC recorded a year-on-year loan growth of only 4%, while REC saw its growth slow to 1%. This performance stands in contrast to the broader financial system, which saw non-food credit growth reach 18.3%, and the power sector, which witnessed a 23.8% increase in bank credit during the same period.
Morgan Stanley noted that these figures fall short of expectations, even after previous downward revisions to growth forecasts. The brokerage suggested that the current path to meaningful growth in Net Interest Income (NII)—the difference between interest earned and interest paid—is becoming more complex.
Margin Pressure and Earnings Outlook
Investors are now watching how these companies balance growth with profitability. Morgan Stanley highlighted a difficult choice facing the lenders: to maintain market share, they may need to offer more competitive pricing on loans, which could compress profit margins. Alternatively, if they choose to prioritize margins to protect their spreads, loan growth might remain sluggish.
Furthermore, the brokerage noted that there is limited room for earnings growth driven by improvements in asset quality. Since the ratio of impaired assets—loans that are not performing well—is already close to historical lows, the companies cannot easily rely on asset recovery to boost profits as they might have in the past.
Reflecting these concerns, Morgan Stanley lowered its core earnings per share (EPS) estimates for PFC by 5.5% for FY28 and 7% for FY29. REC saw similar cuts, with EPS forecasts reduced by 5% and 7% for the same periods respectively.
Moving forward, the primary factor for investors to monitor will be whether loan growth can return to double-digit levels. The brokerage indicated that a return to more significant expansion in lending would be necessary to reconsider a more positive view on these stocks. Until then, the market is likely to focus on upcoming quarterly results to see if there is any early evidence of an improvement in loan disbursement and margin stability.