LendingClub Corp has gotten hammered the last two days since the company announced that its chief executive has resigned in the wake of problems uncovered in an internal audit, and the hits keep on coming. Morgan Stanley analyst Vasundhara Govil and team did have an Overweight rating on the online lending platform, but they have since moved to Not-Rated following this week’s news. They also slashed their base case price target from $16 to $5 per share.

LendingClub Corp Stock Closes At Record Low

Negative impact to institutional investor demand

In a report dated May 10, they highlighted their concerns that LendingClub’s results in the near term will likely be negatively impacted by the damage this week’s announcements is having on the company’s reputation. They add that demand among institutional investors may weaken due to the increased reputational risk and note that it could take months to see just how bad the damage will be.

LendingClub CEO Renaud Laplanche, who has been the face of the company, departed after the company’s internal audit uncovered an improper allocation of some loans to an investor. The internal review also revealed a potential conflict of interest as he did not disclose that he had invested in a firm that LendingClub was considering investing into.

LendingClub investors may hold back for a time

Ultimately, no harm was done because the company bought those loans back from the investor in question, but the Morgan Stanley team is concerned that other investors will stop investing in LendingClub and take a closer look at their own loan books to make sure that all of the loans comply with their own standards. It may take time for these investors to return to the platform because it could take a while for them to ensure that it is following their standards for loans.

Govil and team sees this as being plausible because institutional investors tend to be averse to risk. Although at one point this could have helped LendingClub form a moat around itself, now this trait could pose a problem because this allocation misstep increases risk. They warn that an even more bearish scenario would be that institutional investors avoid the platform entirely in the coming quarters to make sure no other problems are uncovered as scrutiny intensifies.

Relationships and sentiment also impacted

The Morgan Stanley team also notes that Laplanche played a key role in forming new investor relationships, and as such, his departure could have an impact on future relationship formations. He had been very respected within the industry, and some saw him as being the force behind building relationships with institutional investors.

In addition to Laplanche, three other executives also resigned, with some reports suggesting that the chiefs of LendingClub’s Investor Group and Institutional Investor Group are among them. If the reports are true, there could be significant gaps in management at the company for a while.

LendingClub stock continued its nosedive on Tuesday, falling 11.26% to close at a record low of $4.10 per share.