BMO Nesbitt Burns Inc. revised its ratings on three of the big banks today, upgrading Bank of Montreal and CIBC and downgrading Bank of Nova Scotia.

Nesbitt financial services analyst Ian de Verteuil is upgrading BMO to “Outperform” from “Market Perform”, and upgrading CIBC to “Market Perform” from “Underperform”. Meanwhile Scotiabank is downgraded to “Market Perform” from “Outperform”.

“Over the course of the past 12 months, BNS shares have been the second best performing large bank, and BMO and CM have been the two worst performing bank stocks,” he says. “While stock price moves over the past year are clearly a factor in our ratings changes, there are also several fundamental and valuation issues that have surfaced.”

“On the fundamental front, we have become somewhat more concerned about the North American automotive sector (as well as the overall domestic manufacturing business in Canada),” he says in his report. “Scotiabank is disproportionately more exposed to these sectors than its peers. We aren’t changing estimates, but would not be surprised to see some up-tick in loan impairment rates at the BNS.” BMO and CIBC are not exposed to the same degree, he adds.

“Furthermore, over the past four quarters, CIBC has been dealing with some specific problems in its unsecured consumer loan book that has hampered earnings. We now expect to see some improvement in this situation at CIBC in the coming year, and are raising our estimates slightly,” he adds.

“From a valuation perspective, we note that BMO and CM are somewhat cheaper than Scotiabank shares. This is reasonable given the international growth opportunities for BNS. However, at this stage, there is no ‘consolidation’ premium in either BMO or CM shares,” de Verteuil says. “While we are reticent to speculate on progress on this front (and the situation in Ottawa is certainly volatile), we are aware of a more open-market stance by decision makers.”