Johannesburg — AN IMPROVEMENT in global risk appetite coupled with signs that the economic crisis may be bottoming out helped local bank stocks rally yesterday.

Bank shares were buoyed by investors' hopes that the worst was over for the sector as their European peers gained ground.

Banking stocks rose as much as 3,87%, with Standard Bank up 4,60% before ending the day at R88,70. FirstRand jumped 3,33%, and last traded at R14,06. Nedbank was 3,86% higher, and closed at R98,05, and African Bank climbed 3,6% before closing at R80,50.

But the banks index rally fizzled out to end 0,58% lower. The financials index eased 0,79%. The JSE all share closed 1,14% down.

"A lot of people reckon that the global economy might be in a turning point in the next six months or a year," said Absa analyst Christopher Gilmour.

"Investors recognise that the banking sector will be the first recipient of an improving economy and investors are looking favourably to SA's banking sector because they are well capitalised."

Gilmour said that although the banking sector was likely to see its earnings fall this year, a much slower decline in consumer spending was fuelling confidence in

the sector. A stronger rand was also a factor for international investors buying South African stocks.

The rand rallied to a 10- month high to the dollar after SA posted an unexpected trade surplus and better-than-forecast economic data in Europe and Asia boosted demand for higher- yielding assets.

"The market is now discounting all the bad news and saying recovery for these banks is going to be quite significant when it comes along," another trader said. "So they are starting to price in that now and they are buying the banks."

South African banks are under pressure as the country sinks deeper into recession, with trading proving to be tougher than expected as bad debts mount and the value of their investment portfolios shrinks.

Absa and FirstRand released worse-than-expected trading updates last Tuesday, and Nedbank and Standard Bank have forecast lower profit.

FirstRand said last Tuesday its earnings would be lower due to a rise in nonperforming loans at its FNB banking unit and vehicle financing business Wesbank.

"The banks, from an earnings point of view, are at the worst point possible in the cycle," Jan Meintjes, a portfolio manager at Gryphon Asset Management, said. "They're earning less interest on their capital, bad debts are rising, and to protect themselves they are lending less.

"So from a volumes (and) margins point of view, they are under pressure," Meintjes said.

With Reuters, I-Net Bridge