One of Bay Street’s biggest bank bears is changing his tune on a trio of Canadian financial sector stocks. 

Veritas Investment Research analyst Nigel D’Souza raised his view of Royal Bank of Canada, Canadian Imperial Bank of Commerce and National Bank of Canada to "sector outperform", after having the equivalent of a sell rating on shares of the three companies since 2018.

While D’Souza thinks investors should remain underweight Canadian financials overall, in his view RBC, CIBC and National Bank are better-positioned relative to their peers due to their more concentrated exposure to the domestic market, particularly residential mortgages. 

In an interview on BNN Bloomberg, D’Souza said the relative strength of Canada's residential real estate market should put a cap on potential sour loans.

“As long as real estate prices remain relatively stable, even if we do get a second lockdown, as long as impairments and delinquencies are relatively contained, we think the Canadian banking franchises will perform well enough to carry the banks through and result in those banks outperforming their peers that are more internationally oriented,” he said.

Of those more internationally-oriented banks, D’Souza has a "sector underperform" rating on Bank of Montreal, Bank of Nova Scotia and Toronto-Dominion Bank. D’Souza said that trio would be more exposed to recession risks due to their international footprints in the United States and Latin America.

“Now that we’ve entered a more recessionary environment, U.S. markets and Latin American markets historically, in periods of economic stress, tend to experience higher write-offs and higher loan losses,” he said. “The range of potential loan losses for the international banking segments of a bank like Scotia or TD could range between one or two per cent next year depending on how conditions play out.”

“One or two per cent in terms of the loan loss ratio doesn’t sound significant, but that could make the difference between these banks having downside limited to 10 per cent versus having downside as high as 30 per cent.”