Analysts said on Thursday banks would need to shore up their capital bases to stay afloat.

But raising capital could prove difficult amid lingering worries over the banking system's health, and analysts said the government might be forced to step in and bail them out rather than risk a partial collapse of the sector.

"Banks are likely to see their NPLs rise by some 13 trillion won by the end of this year (from end-September) due to heavy Daewoo exposure," said Kim Byong-sok, senior analyst at Hannuri Investment Securities.

The Financial Supervisory Service (FSS) said on Thursday NPLs held by 17 South Korean commercial banks totalled 19.03 trillion won ($16.4 billion) at the end of September, down 27 percent from 25.94 trillion won at the end of June.

But the agency said it expected the figureto rise due to the ongoing restructuring of the troubled Daewoo Group.

South Korean banks are expected to suffer heavy losses stemming from the near-bankruptcy of the country's second largest conglomerate which racked up an enormous $73 billion in debts. Domestic banks hold $22.4 billion in Daewoo loans.

Analysts said huge provisioning requirements for Daewoo bad debt would deal a heavy blow to banks' balance sheets and further deplete inadequate capital bases.

Not all South Korean banks are expected to successfully meet the eight percent capital adequacy ratio required under Bank for International Settlements (BIS) standards after the Daewoo debt workouts, they said.

"Banks will need to raise their capital base but they knowit would be difficult because their shares are unpopular," said an analyst at Warburg Dillon Read Securities.

"The government may be forced to help out," he said. Thegovernment has already spent most of the 64 trillion won set aside for recapitalising the Financialsector.

Analysts said banking shares had already reflected most ofthe bad Daewoo news, including the expected rise in NPLs, but lingering uncertainties about the health of the Financial system were weighing against them.

Banking stocks have tumbled since the Daewoo crisissurfaced on July 19. The banking sector index lost 40 percent to the year's low close of 162.69 points on October 5 from 268.55 on July 19. The KOSPI fell 23 percent during the same period.

The banking sub-index closed on Thursday at 173.45 points. The tumble has pushed the sub-index's 14-day RelativeStrength Indicator, a popular measure of stocks' momentum, to 29.95 on Thursday.

Any reading below 30 indicates an oversold situation andsignals a possible rebound.

The financial regulator said the end-September NPL figure had fallen to 6.2 percent of the commercial banks' total credit, compared with 8.7 percent at the end of June.

"This is really high compared with below two percent ratiofor banks in advanced countries," said Kim ofHannuri. "...It's only going to get ugly."NPLs are defined as loans on which interest has not beenpaid for three months and those held by companies suffering severe Financial troubles.

South Korea's commercial banks had total loans of 309.37trillion won at the end of September, up 10.6 trillion won from 298.77 trillion won at the end of June. The FSS said the decline in total NPLs during the thirdquarter was due to the sale of NPLs to Korea Asset Management Corp by two major banks.

REUTER