Investors in Hong Kong's smaller banks, which have seen heavy rumour-driven gains in recent weeks, are showing signs of unrealistic earnings expectations, Merrill Lynch says. In a report issued yesterday, the bank said some smaller banks had seen their prices climb by more than 200 per cent since May on real or imagined shareholder restructurings linked to mainland parties. The steep rises had helped the banking sector outperform the Hang Seng Index by more than 15 per cent in the past year but had left some counters out of step with their projected earnings growth. Merrill Lynch banking analyst and vice-president Keith Irving said: 'The current uplift in share price would require dramatic - and in our view unrealistic - increases in earnings expectations over the next two to three years to be justified.' Better mainland access would not necessarily mean a significant rise in earnings - or justify a tripling in share price - 'given the restrictions which still apply and the difficulty of making a credit assessment in [China]'. Ka Wah Bank has gained 238 per cent since May largely on hopes that its largest shareholder, Beijing-based China International Trust & Investment Corp would boost the bank's mainland business. With a prospective price-earnings ratio of 28 times, Ka Wah would have to improve its bottom line very fast to justify its share price. Investors might be expecting too much of the bank, the report implied.