Presidents Song Dal-ho of Kookmin and Oh Sei-jong of Long Term Credit Bank exchanged a memorandum of understanding to merge as of January 1, 1999. It was the third bank merger in two months as South Korea's battered financial industry braves 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 $58.5 billion bailout package last year.

"The two banks will make the best efforts to create a leading bank that is true to the name by maximising the synergy effect of the two banks' specialities and introducing an advanced system in bank management," the two banks said in a joint statement.

Kookmin Bank is one of the country's strongest banks with an emphasis on the retail sector while Korea Long Term Creditfocuses on wholesale banking providing loans to corporates.

Analysts welcomed the marriage, touted by local media as "a match made in heaven," and said the merger was poised to put pressure on even the healthiest banks to follow suit.

"Kookmin and Long-term Credit Bank merger do make more sense than mergers we've seen so far simply because their businesses are complementary," said Sephen Marvin, head of research at Jardine Fleming Securities in Seoul. "There is much less overlap," he said.

Lee Jeong-ja, head of research at HSBC James Capel Securities, said good banks such as Housing and Commercial Bank and Shinhan Bank would seek mergers as a result.

"Housing and Shinhan would feel compelled to join hands to stand at equal footing with the giant merged banks," she said. Spokesmen at both banks denied they are seeking mergers.

Hana Bank and Boram on Tuesday officially announced a 41.1 trillion won merger. In July, Commercial Bank of and Hanil said they were joining forces.

Commercial and Hanil,which have combined assets of 96 trillion won as of end-June, would become the second largest bank after the latest marriage.

The Friday merger would have total assets of 100.6 trillion won ($73.6 billion), a workforce of 13,72 and 556 domestic branches. Kookmin would become the acquiring firm and Long Term Credit would be dissolved, the statement said.

The banks said the merger ratio would be determined later based on market value, reflecting net asset value examined by outside experts.

The banks would seek approval from their shareholders before November 10 and launch a contest for a new name before operation.

"The two banks will try to select a strategic foreign investor soon to recapitalise," the statement said.

The merged bank would seek foreign investment for recapitalisation first before going to the government for help, the president of Long Term Credit told reporters.

The International Finance Corp invested $25 million by purchasing Long Term Credit Bank's subordinated convertible bondsearlier this year.

Shares of the two banks fell by midday on profit-taking as the news has already been reflected in the market. Kookmin lost 290 won at 3,870 and Long Term Credit fell 45 to 2,320.

Both banks have retained good health and profitability.

Kookmin posted a net profit of 6.5 billion won in the first half of 1999 and Long Term Credit 51.2 billion.

Kookmin's capital adequacy ratio, as defined by the Bank for International Settlements (BIS), stood at 12.00 per cent at the end of June, while Long Term Credit's was 9.61 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. Kookmin is in the midst of merging with Daedong Bank as the result.