May 21 - Household debt driven by mortgage credit expansion in the Canadian market is the main threat to the credit risk profiles of Canadian financial institutions, as highlighted by the stress tests outlined in Fitch Ratings' special report published today. Low interest rate levels and a favorable economic environment have fueled the upward trend in Canadian house prices over the past 10 years. Over this time period, house price increases have outpaced income, leading to record levels of household debt. Despite record high debt-to-income ratios, persistently low interest rates have made an increased debt burden bearable by reducing households' debt service ratio. As a result, Canadian households have become more vulnerable to adverse shocks. As of Jan. 31, 2012, the six largest Canadian banks (The Big Six) had $912 billion of exposure to the domestic residential mortgage market through residential mortgages ($730 billion) and home equity lines of credit (HELOC, $182 billion). Fitch used a single-factor stress test to assess the impact of a real estate shock on the banks and, more broadly on the system. Fitch applied three-year cumulative losses of 1%-10% on the residential mortgage and HELOC exposures of the six largest Canadian banks. Cumulative gross losses for the Big Six varied from $9.1 billion-$91.3 billion depending on the magnitude of the stress, but declined to net losses of $4.1 billion-$41.5 billion after taking into account mortgage insurance provided by mortgage insurers owned or backed by the Canadian government. In this limited single-factor stress test, Royal Bank of Canada (RBC) and Canadian Imperial Bank of Commerce (CIBC) are viewed as most exposed to potential mortgage risk given the size of their domestic mortgage books relative to their lending, and in the case of RBC, less use of mortgage insurance relative to peers. Bank of Montreal (BMO) and Toronto-Dominion Bank (TD) are viewed as the least exposed to mortgage risk given the smaller size of the domestic mortgage book relative to total loans in the case of BMO and higher use of mortgage insurance, particularly in the case of TD. The special report, 'Evaluating Canadian Banks' Residential Mortgage Exposure', provides bank-specific results of stress-tests for the Big Six, followed by an analysis of the Canadian housing market and households' vulnerability to adverse shocks. The full report is available at 'www.fitchratings.com' or by clicking on the link. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: Evaluating Canadian Banks' Residential Mortgage Exposure
