There were only a handful of mergers and acquisitions in the local banking industry last year, but they gave strong clues about what is likely to happen in future. The most significant development occurred before Christmas when Dah Sing Bank announced its purchase for 694 million yuan of a 17 per cent stake in Chongqing Commercial Bank, one of the mainland city banks. Dah Sing became the first of Hong Kong's medium-sized banks to venture into China - and it will not be the last. 'More banks will negotiate with mainland lenders [on equity investment],' said Peter Wong Tung-shun, the outgoing chairman of the Hong Kong Association of Banks. Ryan Tsang Yee-king, a credit analyst at Standard & Poor's Ratings Services, said the fact Hong Kong was a mature banking market and that lenders had to look for new income streams meant the 'go to China' story would continue. However, there is still a 'go to Hong Kong' story. Last year, China Construction Bank, one of the big four state-controlled banks, made its first acquisition abroad, buying Hong Kong-based Bank of America (Asia) for HK$9.71 billion. Mr Wong said he expected more such moves as mainland banks prepared to extend their reach beyond China. 'Hong Kong is likely to be their base of expansion so they need to build up business here,' he said. Through Public Financial Holdings (formerly JCG Holdings), Malaysia's third-largest bank, Public Bank, in February last year bought Asia Commercial Bank for HK$4.5 billion. It said it would use Asia Commercial as a base for expansion into Greater China. The last deal of the year was strictly local. Wing Hang Bank bought Inchroy Credit, a car loan company, for HK$1.4 billion. The likes of HSBC, Hang Sang Bank, Standard Chartered Bank and Bank of East Asia have a presence in the mainland through their own branch networks. Their business has grown in unison with the gradual opening of the Chinese market to foreign competition, embracing activities such as the qualified domestic institutional investor scheme, which lets some banks invest in overseas assets on behalf of mainland clients. However, foreign lenders were not allowed to tap the yuan retail banking market until the China Banking Regulatory Commission revised the rules in November. Soon, foreign banks that are willing to incorporate subsidiaries in the mainland will be allowed to take yuan deposits and lend yuan. Among those that have passed the first hurdles are HSBC, Hang Seng, Standard Chartered, Bank of East Asia and DBS Bank (Hong Kong). 'The pace of growing organically in the mainland is relatively slow, but taking a stake in a city commercial bank allows lenders to leverage their partners' advantages immediately,' Mr Tsang said. In Hong Kong, banks are expected to report decent profits for last year as they benefit from the economy and the flood of money into the Hong Kong stock market in pursuit of China assets that are likely to appreciate along with the yuan. The yuan advanced more than 3.5 per cent against the US dollar last year. It stood at 7.8210 in US dollar terms on December 25, at virtual parity with the Hong Kong dollar's link to the greenback. In July 2005, when Beijing revalued it by 2.1 per cent, the yuan had stood at 8.11 to the dollar. Joseph Yam Chi-kwong, the chief executive of the Hong Kong Monetary Authority, ruled out changes to the linked-currency system, saying that yuan-Hong Kong dollar parity would have only a psychological effect. Despite the peg, Hong Kong interest rates became detached from US rates as liquidity in the banking system remained abundant. Hong Kong lenders increased interest rates by only 0.25 percentage point in the first half of the year, while the US central bank raised its key rate by one percentage point in four quarter-point increments. Then, as the Fed put US rates on hold, Hong Kong rates were trimmed by a quarter point. Home loan rates fell to 5 per cent and lower as banks scraped for business. Some offered incentives such as cash rebates or introduced innovative products such as mortgages linked to the Hong Kong interbank offered rate. Market watchers believe the fierce competition in the mortgage market will continue this year. Some lenders may grow keener on mortgages after the implementation of Basel II, an international agreement that governs the capital adequacy standards of banks. Simon Topping, executive director of the HKMA's banking policy department, said some banks might focus more on mortgage or personal lending because under the new accord, they will be required to retain less capital than before when making these kinds of loans. On the consumer banking front, the long-awaited deposit insurance scheme took effect in September. It protects Hong Kong dollar and foreign currency deposits of up to HK$100,000 and currently covers more than 80 per cent of account holders. Structured, secured, or term accounts with a maturity of more than five years are not covered. Meanwhile, some big lenders, including HSBC, Standard Chartered and Bank of East Asia, extended branch business hours on weekends after the five-day clearing week was introduced in September. Some smaller banks responded by extending their business hours on weekdays. However, not everyone in the industry believed that longer hours were worth the bother. Hang Seng Bank reverted to the old 51/2-day system in November because of a lukewarm response to its seven-day-a-week experiment.