EUROPEAN BANK stocks soared yesterday, as buoyant results from UBS, relief at watered-down global regulatory proposals and the afterglow of last Friday’s stress tests results overcame investor nervousness.

The FTSE Eurofirst banks index closed up nearly 5 per cent, the best performance since the €750 billion ($970 billion) euro zone bail-out package was sealed on May 10th, outshining other sectors in Europe and bank stocks elsewhere in the world.

“Banks have been the biggest underweight sector for European investors. That position appears now to be reversing,” said Daniel Davies, analyst at Credit Suisse.

UBS, which led the rebound, closing up 11 per cent, made net profits of SFr2 billion (€1.46 billion) in the second quarter, a far cry from the yawning losses of a year ago, as its investment banking business outshone Wall Street rivals.

A bias towards relatively well-performing equities, rather than struggling fixed income, combined with an improvement in private banking set the Swiss bank on course to return to sustained profitability after two difficult years.

“We think the results, especially in comparison and relative to our peers, look pretty good and we’re very happy,” said Oswald Grübel, chief executive.

French and UK banks were also big gainers thanks to confirmation from the Basel Committee on Banking Supervision late on Monday that the international bank regulator had moderated several of its planned crackdowns.

Deutsche Bank posted second-quarter pretax profit in line with expectations, helped by lower loan loss provisions amid weaker industry trends in investment banking. Deutsche’s corporate banking and securities division, which posted €779 million in pretax profit, and global transaction banking with €478 million, accounted for the lion’s share of €1.52 billion in group pretax earnings. Deutsche performed less strongly than in the first quarter, but 16 per cent stronger than during the year-earlier period, mirroring a trend among US peers.