In a long-anticipated deal, the bank heads on Tuesday exchanged a memorandum of understanding on the merger. It was Korea's second bank combination in the past two months as its battered financial industry undergoes painful restructuring.

South Korea is pushing forward with financial sector reforms, including bank mergers, under the watchful eye of the International Monetary Fund, which arranged a $58.35-billion bailout package last year.

Kim Chul-jung, a financial analyst at Ssangyong Investment & Securities, said the merger was expected to lead to further tieups in the banking sector.

"Chohung Bank and the Korea Exchange Bank, and Kookmin Bank and Housing and Commercial Bank are next in line," he said.

Chohung has said a merger with another bank is imminent, but declined to comment on the identity of its partner. Bankofficials at the other three denied the merger scenario suggested by the analyst.

For Hana and Boram, their merger "represents a birth of a leading bank in terms of assets, net worth and profitability that can compete in global financial markets," the two banks said in a joint statement.

In July, Commercial Bank of Korea and Hanil Bank said they were merging. Analysts said they welcomed the merger, which was voluntary, rather than under government pressure.

"Unlike the previous bank merger, this has set a precedent of a voluntary marriage between banks," said Kim Byong-sok, financial analyst at Hannuri Investment Securities.

The merged bank would have total assets worth 41.1 trillion won ($30.7 billion) and a work force of 3,274 at 216 branches, ranking seventh among local commercial banks in terms of assets, the banks said.

The net profit of the merged bank was expected to cross one trillion won in 2002, they said.

The banks said the ratio of the merger would be determined later, after are-evaluation of assets.

The merged bank would begin operating in January after the asset re-evaluation, shareholders' consent and approval from the finance ministry, the statement said. It said the banks planned to cut a total of 400 jobs. Shares of the two banks were unmoved by the news as it had been widely expected. Hana was up 50 won to 4,600 in afternoon trade, while Boram was off 185 to 1,780.

Hana's Kim told reporters his bank had no further plans to merge with another bank and would try to attract investment from foreign banks.

Hana is currently in the process of absorbing the ailing Chungchong Bank.

Kim also said a request for government support would be made in the near future.

"We will seek government fund support after a detailed draft for the merger is out by the end of this month or the beginning of next month," he said.

Analysts said the government, which had promised to help finance a voluntary merger, should stay out of the management of the merged bank.

"The government'sinfluence should be limited in order for the merged bank to succeed," said Kim of Hannuri. Local media said the South Korean government planned to provide some 900 billion won to the merged bank.

Hana and Boram, both founded as short-term finance firms, were relatively free from large-scale government policy loans, which have been blamed for problems in the nation's banking sector.

Hana's capital adequacy ratio, defined by the Bank for International Settlements (BIS), was 13.25 per cent at the end of June while Boram's was 11.28 per cent.

South Korea has asked all its commercial banks to improve their capital adequacy ratios -- the risk-weighted ratio of net worth to assets -- to the BIS standard of eight per cent or higher as recommended. The government has already ordered five ailing banks to close down and hand over key operations and assets to healthier banks.