May 21, 2012 / 3:10 PM / 8 years ago

TEXT-Fitch: Canadian banks' residential mortgage exposure manageable

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
The full report is available at '' or by clicking on the
Additional information is available at ''.	
Applicable Criteria and Related Research: Evaluating Canadian Banks' Residential
Mortgage Exposure
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