Stock-market punters have been advised to place bets on one or more mergers of mid-sized banks in Hong Kong over the next 12 to 14 months. Synergies resulting from such mergers, Morgan Stanley calculated in a recent study, could boost earnings in a merged entity by about 27 per cent. Assume no change to the price-earnings multiples at which mid-size merger candidates trade - about nine times - and those enhanced earnings would imply a 27-per cent gain in the share price of the merged entity. If a merged operation has the scale to command the multiples at which Bank of East (BEA) shares trade, for instance - 13 times earnings - the gain could be 80 per cent. Discount the 'China premium' built into the BEA share price - the group has the largest branch network of all foreign banks operating on the mainland - and you are still left with a potential boost of 50 to 60 per cent, argues the Morgan Stanley bank team, which is headed by Amit Rajpal. The argument advanced in the research paper is not new. But Morgan Stanley has run some numbers based on a particular scenario - the merger of Wing Hang Bank, controlled by the Fung family; and Wing Lung Bank, controlled by the Wu family. Morgan Stanley emphasises this could be 'only one of a number of possible combinations' and it has zeroed in on the two only because they are the only family-owned mid-sized banks under its coverage. But punters may make more of the hypothetical scenario, as well as the role that could be played by minorities on each of those share registers. DBS of Singapore, which has already made a big raid on Hong Kong through the takeover of Dao Heng Bank and has indicated that is not the end of its expansion plans, has lain dormant on a 10 per cent stake in Wing Lung for the past 10 years. The Singapore Government investment arm, Temasek Holdings, which holds 15.1 per cent of DBS, has a 5 per cent stake in Wing Hang Bank. It is a safe bet that those influential minority partners are able to act in concert and would welcome a boost to the value of their shareholdings likely from a merger. They would also have little patience with arguments of family prestige holding up those prospects much longer. Asked to comment, a spokesman for DBS told Business Post: 'DBS is building a Pan-Asian franchise and we are extremely pleased that our combined Hong Kong operation positions DBS as the fourth-largest bank and the third-largest issuer of credit cards. 'We have been a long-term investor in Wing Lung Bank. We obviously are not in a position to comment on their M&A [merger and acquisitions] plans or aspirations.' Morgan Stanley analysts, however, think that family shareholders of Hong Kong banks face the danger of 'complete marginalisation' that could result in a takeover and the steady erosion of their franchises if they were maintained in their sub-scale form. 'Our view of the mid-sized banks is that they are fairly valued on a stand-alone basis given the extremely tough operating environment,' concludes Morgan Stanley. 'However, for investors with a long-term horizon [up to two years], we would recommend buying a basket of shares of mid-sized banks because there could be a dramatic uplift on account of consolidation activity - which we consider probable in a two-year time frame.'