Canadian banks could face losses of up to $91 billion in the event of a housing market meltdown, estimates Fitch Ratings.

In a new report, Fitch applies a single-factor stress test to assess the impact of a real estate shock on the banks. Using three-year cumulative losses of between 1% and 10% on the residential mortgage and home equity lines of credit (HELOC) exposures of the six largest Canadian banks, the rating agency reports that cumulative gross losses for the Big Six banks ranged from $9.1 billion to $91.3 billion depending on the magnitude of the stress.

However, it notes that these estimates declined to net losses of $4.1 billion to $41.5 billion, after taking into account mortgage insurance provided by mortgage insurers backed by the Canadian government.

In this limited single-factor stress test, Royal Bank of Canada (RBC) and CIBC are viewed as most exposed to potential mortgage risk given the size of their domestic mortgage books relative to their lending, says Fitch.

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.

“Overall, the results show that the banks can individually absorb the negative impact of a housing shock under various stresses,” Fitch concludes.

From a rating standpoint, Fitch says it views the major Canadian banks as having sufficient capital cushion to absorb the various stress scenarios outlined in the report, but it says that their ratings would come under negative pressure if residential real estate losses start to approach its more severe stress cases.

The report also indicates that, while it sees the more severe scenarios as unlikely at this point, Fitch also views the current pace of home price appreciation as unsustainable.

“A sustained period of high unemployment or an interest rate shock could adversely affect the ability of leveraged homeowners to meet their mortgage obligations, although Fitch views high unemployment as the more likely potential driver,” it says, adding that a drop in immigration and a deceleration of economic growth in Asia could also affect the housing market.