Shares in Hong Kong's mid-cap banks are set to stage a strong rally this month as a result of the Hong Kong Monetary Authority's new measures to strengthen the currency board, according to a report by Core Pacific-Yamaichi. The report upgrades Yamaichi's sector recommendation from underweight to neutral and claims the HKMA's measures will reduce money market volatility and lead to a more stable operating environment. Yamaichi said the financial crisis in Russia and pressure on the Hong Kong dollar peg from yuan-devaluation rumours had caused share prices of most mid-cap banks to fall by 20-30 per cent in August. According to the report, banks are suffering from negative interest-rate spreads but weak economic sentiment will deter them from raising their prime lending rates. 'Mid-cap banks will benefit most [from the currency-board measures] and after the price slide in August, mid-cap banks may stage a strong rebound in September,' it said. The report said that local banks' operating performance would be disappointing this year, but wider interest-rate spreads would support higher net interest income next year. 'Despite the banks' financial strength and high liquidity,' it said, 'the prolonged economic adjustment will weaken their asset quality and may eventually affect their capital-adequacy ratio.' Several mid-cap banks, including Bank of East Asia, Wing Hang Bank, FPB Bank and Dah Sing Financial, have said they would consider mergers with other banks if opportunities arose.