National Australia Bank had its rating raised to neutral and Commonwealth Bank of Australia was cut to underperform by Merrill Lynch & Co.

NAB was raised from underperform as a decreasing risk of writedowns should narrow the price difference against peers, analysts led by Matthew Davison wrote in a note to clients today.

Commonwealth Bank was cut from neutral because it is relatively less attractive than other Australian lenders rated neutral, they said.

On all our measures, CBA is the most expensive of the major banks, the analysts wrote.

While NAB retains a number of concerns, the likelihood of less capital raising risk going forward suggests the discount in the stock is now too deep.

NAB is priced at 1.29 times the book value of its assets, compared with 1.86 times for Commonwealth Bank and 1.5 times for the six-stock S&P-ASX 200 Banks Index, according to data compiled by Bloomberg.

Merrill Lynch's pecking order of Australia's four biggest banks places Australia & New Zealand Banking Group as the most preferred lender, followed by Westpac Banking Corp, NAB and CBA.

BLOOMBERG