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Several foreign financial institutions estimate that the July 11 strike by unionized workers at about a dozen domestic banks will serve as a catalyst for facilitating the second-phase overhaul of the banking sector, financial sources said yesterday.

In a recent report on Korean banks, Morgan Stanley Dean Witter said that the one-day strike has laid the foundation for speeding up Korea's financial restructuring through bank mergers using a financial holding company.

The global financial services firm also said that the walkout has provided a momentum to help banks clean up bad loans and improve transparency in governance, leading to a marked differentiation between strong banks and weak ones.

Putting forward a very positive outlook for Korean banks, Morgan Stanley thus advised foreign investors to buy more stocks in healthy banks. The U.S. financial firm cited higher-than-expected first-half profits, the expected acceleration of the banking reform, the application of stricter bad-asset criteria and subsequent efforts to cut bad loans and an anticipated drop in Korea's long-term interest rate.

Ending the short-lived work stoppage, the government and the Korea Financial Industry Union, an umbrella organization of bank labor unions, struck a deal under which nonviable banks will be placed under a financial holding company in October this year, among other things.

In addition, J.P. Morgan pointed out in a recent daily analysis report on Asia that the agreement between the government and the bank trade union has provided an opportunity to speed up the financial restructuring via the financial holding company system.

The U.S. investment bank, however, added that the deal has imposed a greater burden on the government.

In a recent report on the Korean financial market, Merrill Lynch said that following the strike, Korean companies are now able to refunding maturing bonds, while funds are returning to investment trust companies.

However, the U.S. securities firm cautioned that it is too early to draw a final conclusion about the stability of the domestic financial market because the return of money to investment trust companies is limited to new instruments that offer tax benefits. Merrill Lynch further noted that a tendency to avoid risks still lingers in the financial market.

Predicting that the composite stock price index, or Kospi, is expected to hover around the 800-point level for the time being, Merrill Lynch stressed that whether stock prices will go up or not will depend not on foreign investors but on the pace of the government's financial restructuring.