The merger of the Bank of China's Hong Kong branches into the Bank of China (Hong Kong) was not only Hong Kong's largest bank merger but also one of the most complicated globally. Never before have 12 subsidiary banks and one credit-card company been merged to form one banking group in Asia. The results have been impressive. The merger created Hong Kong's second-largest bank behind HSBC with HK$820 billion in pro forma assets as of last October 1. The merger was partly driven by consolidation in Hong Kong's banking industry, forcing BoC to create a bigger, more competitive group. But equally important was the parent company's desire to create a more efficient overseas banking group with a better corporate governance structure, not just in Hong Kong but in all its overseas branches. While the immense scale of the BoC HK merger attracted more attention, the Kwangtung Provincial Bank's Singapore branch was also quietly merged into the Singapore branch of BoC from January 1. 'For historic reasons, the group in Hong Kong has basically been a collection of differently branded banks, and it makes a lot of sense to put them together,' Macquarie Research Equities banking analyst Simon Ho says. Although the BoC's Hong Kong branch was established in 1917, it did not 'adopt' its sister branches until after the Communist Party came to power in China. All seven of BoC's mainland incorporated subsidiaries - Kwangtung Provincial Bank, Sin Hua Bank, China South Sea Bank, Kincheng Bank, China State Bank, National Commercial Bank and Yien Yieh Bank - were established between 1907 and 1928. When the Communist Party took over in 1949, these banks were 'nationalised' and their boards of directors entrusted the BoC with their Hong Kong operations. At the time, the BoC was still a part of the People's Bank of China (PBOC), serving as the state's foreign exchange bank, so it made sense for the BoC to control the overseas banking operations of the others. (The BoC was not divested from the PBOC and established as an independent bank until 1979). Meanwhile, between 1947 and 1949, three new banks - Nanyang Commercial Bank, Po Sang Bank and Chiyu Banking Corporation - were established and incorporated in Hong Kong. Hua Chiao Commercial Bank opened for business in 1962. Until the BoC HK merger, these 12 sister branches had been loosely run by the BoC Hong Kong-Macau Regional Office, established in 1962. 'Many of the smaller banks, mostly Beijing or China incorporated, incurred substantial losses or high levels of NPLs that mostly affected the whole group's financial performance,' Capital Intelligence (Cyprus) banking analyst George Lee says. 'And they have different or separate business strategies and different customer bases that create a lot of confusion.' But it was not until the late 1990s that the BoC finally began the long, arduous process of restructuring and merging its Hong Kong branches. The BoC wanted its new Hong Kong banking group to be incorporated in Hong Kong, so it chose to transfer the businesses, assets and liabilities of 10 sister branches into 100 per cent subsidiary Po Sang Bank. Po Sang Bank's name was then legally changed to Bank of China (Hong Kong) Ltd. In the process, BoC HK acquired 14 mainland branches plus one in San Francisco from the merger. Chiyu Banking Corporation and Nanyang Commercial Bank were allowed to remain wholly owned subsidiaries of BoC HK. Chiyu Banking Corporation was ultimately chosen to remain a BoC HK subsidiary after taking into account the preference of some minority shareholders. Chiyu Banking Corp, 70.49 per cent owned by BoC HK, was founded by the overseas Chinese rubber magnate Tan Kah Kee, and his descendants still own a minority stake in the bank. Nanyang Commercial Bank was allowed to remain a wholly owned subsidiary after taking into account the bank's history and reputation it enjoys among overseas Chinese. One of the more cosmetic changes to come from the restructuring has been to unify the 10 sister banks' (excluding Chiyu and Nanyang Commercial) brand name. The restructuring also brought about a number of changes to improve the bank's efficiency. For example, the 12 sister banks' 50 back-office processing centres before the merger have now been consolidated into five. Before the merger, each of the 12 sister banks had its own human resources department. Now there is only one. BoC HK's operating structure was organised around four strategic business units: retail banking, corporate banking and treasury, business planning and finance, and business support services. BoC HK has tried to change its culture from an inefficient state-owned firm whose top priority was greater market share to a profit-driven bank whose top priority is return on equity. These changes will take time. Based on other banks' experiences, it usually takes between three and five years to complete a merger. Earlier this year, BoC HK chief executive Liu Jinbao was quoted as saying the merger would be completed in the middle of next year.