Although Canada’s top six banks enjoyed another record-breaking year in 2005, they will need to embrace change more than ever to meet the challenges of the coming year, according to the Canadian Banks 2006, PricewaterhouseCoopers’ (PwC) annual survey of the banking industry.

“The banks are certain to find 2006 challenging. The year likely holds continued margin pressure, slower growth in lending volumes and increases in credit provisions.” says Diana Chant, partner and leader of the PwC financial services practice in Canada. “It will be a challenge for banks to continue the record-breaking profits of the past few years.”

The Big Six earned a combined net income of over $12 billion and thrived in the strong Canadian economy. If not for litigation losses, aggregate results would have been over $16 billion, an increase of 18.5% over 2004.

“2005 was a banner year for Canadian banks. The economy provided a solid foundation for generating strong profits and the banks responded, delivering another year of outstanding results,” says Chant. “But behind this performance are governance, risk and compliance projects impacting the operations of all banks.”

These projects include the implementation of Sarbanes-Oxley 404 in 2006 for all but one of the Big Six. All banks are leading up to the implementation of the Basel Capital Accord and are also developing systems to manage the new accounting requirements for financial instruments. Added to this is the challenge of an uncertain U.S. economy and the negative consequences a slowdown south of the border would bring.

“Canadian banks and the rest of the world need a robust and growing U.S. economy,” says Chant. “Spending is already trending down in the U.S. With high consumer debt, large fiscal deficits and a weak North American auto industry, it is likely there will be a slowdown south of the border in 2006. 2005 was a great year for Canadian banks. The question now is: Where do they go from here?”

Change is the focus of Canadian Banks 2006, and the survey addressed several emerging trends and hot topics in the banking industry, including:

– sharpening client focus and progressive practices in segmentation;

– aligning governance, risk and compliance with the business agenda;

– operational tax risk;

– re-engineering processes;

– the outlook for economic capital in financial services;

– the new Canadian Financial Instruments Standards;

– 2005 accounting and reporting developments.