HOPES of a turnaround in the battered banking sector sent bank stocks soaring yesterday after better-than-expected profits from US investment banker Goldman Sachs.

Shares raced as much as 13 per cent ahead as the London market resumed trading after the Easter break.

Goldman reported $1.66bn (£1.1bn) in first-quarter profits and announced plans to raise cash to pay back US government bail-out funds, fuelling cheer that the banking crisis may finally be easing.

Barclays was the biggest advancer on London’s FTSE 100 Index, extending gains seen last week after weekend reports suggested it could still sell its entire asset management arm, despite the £3bn iShares deal struck with CVC.

Lloyds Banking Group and Royal Bank of Scotland were also strongly ahead, rising by ten per cent and eight per cent respectively, while Legal and General led a rally in the insurance sector, rising by 14 per cent.

Goldman’s news signalled a step forward in the sector’s return to health after the devastating credit crunch that brought the industry to its knees.

Its first-quarter results – released after the US market closed and a day earlier than scheduled – came as a marked improvement over the $2.29bn (£1.55bn) in losses suffered the previous three months.

The group is also planning to raise $5bn (£3.4bn) though the sale of common stock to go towards paying back the $10bn (£6.7bn) of funding under the US toxic asset relief programme.

Such a move would see it become the first major bank to emerge from the crisis and, it is thought, could spark others to seek to pay-off rescue cash, which comes with hefty restrictions.

Bank shares had already been buoyed last week by news that another US group – Wells Fargo – expected to report record first-quarter earnings of £2bn, well above analyst predictions.

Barclays closed 12 per cent higher before the fourday Easter holiday, thanks also to its iShares announcement.

The £3bn deal with CVC will significantly boost its capital strength, but investors were relishing the prospect of a sale of the whole Barclays Global Investors business.

The sale includes a contractual ‘‘go shop’’ agreement which allows Barclays to seek rival offers until June 18 and it is understood the bank could receive bids for the entire business during this period.