The Internet has put the earnings of Hong Kong banks under intense pressure and triggered a battle for survival that is taking a heavy toll on share prices. The highly competitive market place can quickly turn predators into prey, and survival will require banks to constantly re-invent themselves, analysts warn. Despite recent rallies, the share prices of banks are languishing some 10 per cent to 15 per cent below opening levels at the start of the year. Much of the blame for this lacklustre performance can be laid at the feet of the high cost of providing new technology and the quick price comparisons it enables. It forces margins lower as banks compete with each other, analysts said. The banks have also invested heavily to begin rolling out Internet products this year. Commenting yesterday on the European Internet-banking experience, Goldman Sachs e-finance analyst Richard Ramsden said profit margins had been squeezed to 'unthinkable levels' since the advent of Internet banking. 'In the quest for market share, the question now is not: 'Will we get the loan?' but 'at what price will we get the loan?' ' he said. Mortgages were available in Britain from new entrants offering Internet products at just 35 basis points above the cost of funds, compared with incumbent margin pricing of 120 basis points above cost of funds. In this environment, the return on equity (ROE) had to be adjusted to take the new pricing into account, 'and the bad news is that investors are focusing on these adjusted ROEs', he said. Goldman Sachs has calculated the worst-case impact of the Internet on the results of eight British banks and concluded an average ROE of 21 per cent could be slashed by more than half to just 10 per cent as a result of the online-inspired price war. The assumptions which were used in reaching this conclusion were: Non-current account and non-time deposits being repriced to interbank rates, eliminating the full deposit spread. Loan spreads declining by 300 basis points for personal loans and 60 basis points for mortgages to bring them into line with the most competitive rates on offer. Asset management fees declining by 25 basis points. A 5 per cent cost-reduction achieved by Internet delivery, marginally offsetting some of the pricing pressure. European banks were spending heavily on Internet investment, Mr Ramsden said. However, cost savings flowing from the new technology would be slow to kick in. European banks had spent some 7.5 billion euros (about HK$55.62 billion) on Internet investments, or roughly 15 per cent of their pre-tax profits. Driven by the weight of investments and the competitive environment, the financial landscape was being transformed, Mr Ramsden said. In Hong Kong, a group of banks has responded to the new environment by forming an alliance - Bank Consortium Trust (BCT) - in June last year, with share capital of HK$175 million. BCT's seven founding members were Asia Commercial Bank, Chekiang First Bank, Dah Sing Bank, Liu Chong Hing Bank, Shanghai Commercial Bank, Wing Hang Bank, and Wing Lung Bank. Later First Pacific Bank, International Bank of Asia and Union Bank of Hong Kong joined the group. 'But BCT is just an excuse not to consolidate,' said Roy Ramos, managing director and head of banking research for non-Japan Asia at Goldman Sachs. 'What is holding the process back is family interests. 'From an e-finance laggard a year ago or so behind Singapore and several years behind Australia - let alone the United States or Europe - Hong Kong's banking sector has turned into a true e-convert,' Mr Ramos said. Nonetheless online upstarts were springing up across the value chain. 'And virtual banks, online foreign banks and non-bank lenders, online stockbrokers, financial portals, aggregators, and systems providers are altering the landscape,' he said.