MERRILL Lynch has issued something of a warning note to investors not to expect too much by way of earnings growth from Hong Kong banks. The earnings per share forecasts for HSBC in 1995 and 1996 are 5.6 per cent and 5.3 per cent, respectively. Depending on whether you are a bull or a bear, such modest earning growth from these key stocks either creates a firm basis of support, underpinning earnings in the market, or an anchor, holding the index back. Merrill vice-president Craig Irvine says fundamental change is affecting the banking sector and competition, deregulation and financial disclosure have all made banking in the territory a less lucrative and a less certain place. Deregulation is expected to make the business more volatile and increase the level of competition in the system. Disclosure has shown the banks to have disappointing true earnings and in future banks will not be able to hide fundamental problems in earnings quite so easily. Competition is tied to the emergence of a real interest rate environment, placing significant pressure on net margins and highlighting the importance of effective marketing. Pricing pressure has materialised in residential mortgages, credit cards, hire purchase and trade finance. An outright price war is not expected, nevertheless long-term consolidation seems to be the theme in Hong Kong banking. What the Merrill report does not go into much is probably an even more interesting change due to come. Mainland banks are already seen fighting aggressively in the loan syndication business, undercutting their Hong Kong cousins on a regular basis. Merrill also estimates Bank of China has begun to take market share in deposits. It can only be a matter of time before mainland banks make a very real and concerted attempt to win business across a wide number of fronts simultaneously making the life of the Hong Kong banker even more interesting than it is today.