CS Credit Suisse Group

Eurozone bank stocks surged in trading at the European open on Thursday, leading a broad rally in European equity markets.

The Euro Stoxx Banks index climbed 3.4% as of 10:45 a.m. in London. Shares in Deutsche Bank AG and Credit Suisse Group AG were each up more than 7%.

The rise followed an even-larger surge in Japanese bank shares. Shares of large Japanese banks rose 8.8% in trading Thursday, leaving them above their pre-U.S.-election levels.

Analysts attributed two major factors for the rally: a sharp rise in long-dated bond yields likely heralding higher interest rates to come, and the potential for a major change to the outlook for global financial regulation.

Investors are betting that a continuing U.S.-led push to overhaul banking regulation could be watered down on the back of Donald Trump's election as president.

European banks, backed by local politicians, have complained that new rules, dubbed "Basel IV," would unfairly penalize them, forcing them to thicken their capital cushions.

Now one of Basel IV's key advocates, Federal Reserve Governor Daniel Tarullo, faces an uncertain future, analysts say. Investors are betting that to quickly push through the reforms, Mr. Tarullo will have to cede to European demands to dilute proposals. This would be a boon to large investment banks such as Deutsche Bank, UBS Group AG and Barclays PLC, whose shares rallied Thursday.

The Basel IV proposals broadly require banks to use industrywide calculations instead of their own when assessing risk.

The rally in European bank shares follows a jump in bond yields in Europe, particularly on longer-dated debt. Germany's 30-year bund yield reached 0.9% in European morning trading Thursday, up from below 0.4% during parts of July.

Rises in longer-dated yields is usually good news for banks, whose business model is based on borrowing over short periods at low rates, and lending at long periods for higher rates.

Some analysts connected the rise in yields to Mr. Trump's surprise victory on Tuesday, and to his promise for greater infrastructure spending.

"We expected banks to be hurt in any risk off reaction to a Trump win. However, if it means higher yields and potentially regulatory reform then it may well be beneficial in the longer term," said Bank of America Merrill Lynch in a research note.

Some analysts have expressed skepticism about investing in European banks given Mr. Trump's victory. "European banks have behaved as if they are the play-thing of political risk in recent years and this is likely to dominate in the short term," said Bernstein analysts in a note, reducing the sector to underweight.

Immediately before the election, Credit Suisse analysts suggested that banks wouldn't be obvious winners in either election outcome, but that Mr. Trump's victory "could overall imply less regulatory pressure."

Write to Mike Bird at Mike.Bird@wsj.com and Max Colchester at max.colchester@wsj.com

(END) Dow Jones Newswires

November 10, 2016 07:35 ET (12:35 GMT)

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