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.

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 bonds earlier this year. Shares of the two banks fell by middayon 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.