In a report dated June 17, Merrill said it expected HSBC to report 1998 net income of US$5.06 billion compared with US$5.5 billion in 1997 and earnings per share of US$1.88 compared with US$2.06. "We continue to rate the stock an intermediate termaccumulate given a continuing attractive valuation versus both global and domestic peers even in the face of a significant reduction in our earnings forecast," the report said. Banking analyst Keith Irving said the lower earnings forecast was due to a significant narrowing of margins in Hong Kong, no loan growth in Asia and very pessimistic asset quality assumptions. He said Merrill had the pre-exceptional level to two percent from 16 percent.

Hang Seng Bank Ltd faced a decline in net interest income of six percent this year and Hongkong Bank eight per cent, Merrillsaid. "The impact of deteriorating spreads in Hong Kong is compounded by the absence of loan growth in the territory." Merrill said it expected Hang Seng Bank to see a 50 basis point deterioration in spread in 1998 while Hongkong Bank would see a 30 basis point decline.