British banks were the beneficiaries this morning of a positive note from Dresdner Kleinwort, which upgraded Royal Bank of Scotland and Barclays. Dresdner's analysts said that they were warming to some UK banks after a period of substantial underperformance. While continuing to avoid Bradford & Bingley and Alliance & Leicester, Dresdner reckons that there is minimal read-across from B&B's mortgage arrears and that bad retail and corporate debts are unlikely to hit the peak of 1991. HBOS was the FTSE 100's biggest riser before noon, jumping more than 6 per cent to 335.5p - comfortably ahead of the 275p at which its rights issue has been struck.

HBOS could continue to rise if, as expected, the bank's prospectus contains no bad news. The document supporting HBOS's £4 billion cash call is due out by the end of the week. Sources close to the bank have promised a complete rundown of trading in every product sector, with data up to the end of May. Publication of the prospectus will trigger even more intensive conversations between HBOS management and the bank's institutional investors - and in particular clarify the bank's exposure to the troubled housebuilding sector. However, notwithstanding Dresdner's stance and this week's modest rally, it still feels too early to call a turn in the banking sector's fortunes.

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