Consolidation is the only way Hong Kong banks can survive in an environment of tightening margins from intense competition and sky-rocketing costs of investment in technology, according to Bank of America (Asia). Chief executive Samuel Tsien Wai-kee said the bank's profitability this year fell 45 per cent from last year. 'We start to doubt as to whether the system could still remain resilient if it was subject to external shock of the same magnitude as that in 1987-98,' he said. Price competition for residential mortgages was an aftermath of the two-year crisis, when banks could not find enough loan demand and devoted a lot of their resources to home loans, Mr Tsien said. 'What differentiates this downturn from the one Hong Kong experienced in 1983-84 is that there is at present a lot more competition from foreign banks, whereas 15 years ago, banking was still a protected industry with a certain level of guaranteed profits,' he said. Declining margins would force banks to go for higher volumes in efforts to achieve the same level of profits as they did previously, Mr Tsien said. 'Everybody can think of establishing off-branch automated delivery channels like the Internet as a way to generate more business volume,' he said. 'Apparently, most of them have underestimated the huge amount of costs involved.' He cited a fully fledged on-line stock-trading facility as an example, saying a typical single-function system such as that would cost about US$1 million. 'The question here is how many [lots of] $1 million a typical 20-branch bank can spend when the automated banking functions have to be upgraded and expanded every now and then,' he said. The real threat was that investment in off-branch automated banking facilities - which in fact were not necessarily cheaper than brick and mortar facilities - was becoming a major delivery channel without which banks could not survive. 'It is premature to say if we can generate new businesses or acquire new customers using this new channel. But there is one thing for sure: we cannot survive without it,' he said. Consolidation - merging smaller banks into larger, stronger ones - would be the only way to generate the right level of economy of scale to enable institutions to continue to invest in such technology. 'Small banks can join together to purchase office supplies or even computers at deeper discounts. But in no way can they achieve the same level of cost-saving and economy of scale as through a merger,' he said. It would take time for owners of small banks to change their mind-set to accept mergers as a way to grow their businesses, he said. 'I can't tell exactly when the first merger deal will happen in Hong Kong. Things tend to happen much earlier than people expect. 'It also depends very much on how quickly automated delivery channels will develop,' he said.