The financial watchdog, the Financial Supervisory Service, said the government had signed a memorandum of understanding to sell a 70 per cent stake in Seoulbank to HSBC. A final contract is due to be signed by May 31.

"It can be appreciated that by selling the bank the government is showing it keeps its word," said Mok Young-chung, a banking analyst at ING Baring Securities in Seoul. "Moreover, I think the terms are not so bad."

HSBC will pay the South Korean government $200 million as an "up-front facilitation payment", which the watchdog said was different from payment for the stake purchase.

The global banking group is also likely invest an additional $700 million to ensure Seoulbank meets government-set guidelines on financial health.

"Investors have been waiting for HSBC to makeuse of their capital through Asian acquisitions," said Keith Irving, banking analyst at Merrill Lynch in Hong Kong.

"Korea is a good place to start and as long as the central bank acts favourably towards the acquisition then this could be a strong move for HSBC," he said.

Seoulbank is one of two troubled commercial banks nationalised by the government prior to sale abroad. Sale of the other, Korea First Bank, to a consortium led by US-Based Newbridge Capital was announced in December.

Since South Korea accepted an International Monetary Fund-led rescue package in late 1997, it has closed five non-viable commercial banks and dozens of other ailing financial companies in a drive to clean up its shaky financial sector.

Mok of ING also said HSBC was expected to aggressively exploit Seoulbank's retail banking operations, which would strengthen the local banking industry.

"HSBC's entry will put strong pressure on local banks. It's good for them and it will make local banks change their attitude," saidMok.

The South Korean government owns 93.8 per cent of equity in Seoulbank but plans to order the bank to dispose of all the remaining shares before the sale is concluded.

It was not immediately clear how the disposal would proceed.

HSBC will have a call option to buy the 30 per cent stake retained by the government over a three months period four years after the sale, or between June and August in 2003, under the current schedule.

If HSBC opted not to exercise the option, the South Korean government would have a put option to sell the 30 per cent stake to HSBC within the next one-year period, or between September 2003 and August 2004 under the current schedule.

All the existing bad loans of Seoulbank will be purchased by an asset management company to be established before HSBC's takeover, the watchdog said. The asset management company would also buy loans that were to go bad over the next year.

The government would not intervene in management of Seoulbank in principle but Seoulbank would berequired to obtain approval from 75 per cent of shareholders on major issues, it said.

Seoulbank's loss before provisionings and tax widened to 772.4 billion won $645.28 million in 1998 from 610.7 billion won loss in 1997 and its net loss rose to 2.24 trillion won from 916.6 billion won, watchdog data showed.