UBS Securities Canada Inc. is bumping up its ratings on Royal Bank, TD Bank and Bank of Nova Scotia, and is generally speaking positively about the group ahead of the banks reporting their second quarter earnings.

The firm notes that its fundamental outlook on the bank sector hasn’t changed, and it still sees some fundamental challenges on the horizon, but recent weakness merits an upgrade. “Canadian banks have been weak, off nearly 6% on two months and have underperformed year-to-date amid rate/inflation concerns and recently a weak equity market,” UBS says in a new report. “However, our fundamental outlook is largely unchanged, we continue to see some operating headwinds as we move through [the second half], while valuations have pulled backed materially. Heading into what should be generally positive [second quarter] news flow, we see room for upside.”

UBS says that the current quarter should be generally positive news. “Some moderation in loan growth and continued gradual uptick in credit costs are expected. However, we see some opportunity for better [net interest margins] in a higher rate environment and strong capital markets and trading activity, along with good wealth management growth, should provide lift again this quarter.”

The firm says that Royal Bank has the best near-term operating momentum and solid outlook, and is finally trading at more reasonable valuation. Scotiabank is one of its favoured platforms for the medium-term, with room for a healthy dividend hike this quarter. And, adds that TD Bank’s near-term challenges are distracting from its attractive medium-term growth prospects.

It also still sees operating upside at CIBC. “Results at CIBC could impress again this quarter on the back of continued productivity enhancements, but the stock has held in relatively well as one of the best recent performers in the group,” it notes.