Market Report: Why the banks are set to have their day in the sun

The banks may not be held in the highest regard by the general public, yet that is nothing compared to their recent unpopularity with investors. Thanks to fears over sovereign debt and regulatory demands, the banking groups have been Europe's worst-performing sector over the past three months, but yesterday they finally found some friends.

Royal Bank of Scotland and Lloyds Banking Group both finished high up the leaderboard, driven forwards 1.39p to 42.24p and 1.44p to 52.76p respectively, while HSBC was 6.6p better off at 630.5p and Barclays added 3.95p to close at 275.25p. The rally came off the back of bullish comments from Société Générale, which – saying the market was "sceptical of returns and fearful of risks" – claimed the London-listed banks were "in better shape than you think".

"We are upbeat on four of the five quoted UK banks ... because the crisis strengthened their pricing power while they are inexpensive [and] have sound capital," said its analysts, who added that the groups have less exposure on average to the troubled European countries than their peers on the continent.

The analysts chose RBS as their preferred pick, while Standard Chartered – 18p better off at 1,605p – was the only bank they did not initiate with a "buy" rating, citing its higher valuation, although they did concede there was a chance the Asia-focused group could be a takeover target.

Another broker expressing its enthusiasm was Citigroup, which said a "lot of bad news appears to be priced into a sector which has already undergone significant capital repair in the past two years." Shifting its advice on the European groups to "overweight", Citi chose HSBC – which was holding its annual general meeting – as one of its top recommendations.

The banks were also helped by reports they may be able to sidestep some of the Basel III capital requirements that are set to be introduced – although the EU issued a forceful statement saying the rules would be implemented – while Lloyds got another boost from claims it could dispose of its German life insurance business.

Overall, the FTSE 100 charged forwards 57.88 points to 5,938.87, defying fears of a sell-off before the bank-holiday weekend as consumer confidence in the UK saw its biggest jump since 1993. Essar Energy spurted up to the blue-chip index's summit, rising 22.6p to 451.3p after Deutsche Bank's Lucas Herrmann reiterated his "buy" rating. Pointing out its oil business "has underperformed global oil stocks by 45 per cent over the last year, in spite of material improvement in refining margins", the analyst said the unit was "materially undervalued".

Having gained over 20 per cent in the previous four sessions, Pace failed to complete a perfect week, with the set-top box maker driven back 1.4p to 114.9p on the FTSE 250 after its bid hopes were dealt a blow. Speculation has been rife that it could be in line for an approach, with Samsung named as a potential aggressor, but Seymour Pierce's Ian Robertson pointed out the Korean company's "cross-border acquisitions are few and far between" .

Saying a move for Pace "would not bring improved access to customers nor would it bring much in the way of technology", the analyst still kept his "buy" rating but urged investors toinstead recognise its share price is"too low for a business with a strong position in what is ... a growth industry globally."

The market was not giving up on a number of other takeover favourites, however, including Petropavlovsk. The miner, which was named earlier in the week by Barclays Capital as one of the most likely stocks to receive a bid, jumped up 33.5p to 778.5p, helped by the decision by its chairman and chief executive to increase their stakes.

The London Stock Exchange has also been in focus as a potential bid target for its US peer Nasdaq and was lifted up 41p to 990p, meaning it has added nearly 10 per cent over the last three days.

Speculation continued to move Debenhams forwards, with the department store shifting 1.35p to 74.15p, although traders dismissed the idea that Harvey Nichols-owner Dickson Poon would be the one making an approach. Meanwhile, back on the top-tier index, market gossips were reheating chatter around Sage, as vague talk it could receive a bid from the US helped the software company rise 4p to 286.7p.

There was some good news for the housebuilders, as the latest set of Nationwide figures showed house prices increased 0.3 per cent this month – harldy a groundbreaking jump, but it was enough to help Berkeley power up 26p to 1,125p while Bellway increased 14.5p to 738p.

Northern Petroleum was heading south on the Alternative Investment Market after admitting that it would now end with a full-year loss after tax after cutting its reserve estimates for a number of gas fields in the Netherlands. As a result, the energy group dropped over a third of its share price, slumping 39.5p to 73p.

FTSE 100 Risers

Antofagasta 1,312p (up 54p, 4.29 per cent)

Still rising following Thursday's first-quarter figures in a strong session for the mining sector.

Burberry 1,290p (up 30p, 2.38 per cent)

Luxury retailer rebounds from sell-off earlier in the week after reports it may list in Hong Kong.

Wolseley 1,991p (up 35p, 1.79 per cent)

Plumbing supplies group is upgraded by Royal Bank of Scotland to "buy" from "hold".

FTSE 100 Fallers

BSkyB 834.5p (down 3.5p, 0.42 per cent)

Broadcaster is one of just seven stocks to finish behind, falling to its lowest level for a month.

BP 459.65p (down 1.55p, 0.34 per cent)

Oil giant retreats as Putin says Royal Dutch Shell could now partner with Rosneft instead.

Centrica 316.9p (down 0.6p, 0.19 per cent)

Utility drops after talk revived earlier in the week that it may bid for Scottish & Southern Energy.

FTSE 250 Risers

Supergroup 1,055p (up 34p, 3.33 per cent)

Clothing retailer manages to advance after five straight sessions in the red.

EasyJet 361p (up 11p, 3.14 per cent)

Budget airline gains as its house broker Royal Bank of Scotland increases its rating to "buy".

Invensys 302.7p (up 6p, 2.02 per cent)

Engineering and industrial controls company rises as vague bid speculation continues to spread.

FTSE 250 Fallers

Stobart 134.1p (down 4.9p, 3.53 per cent)

Transport group finishes with wooden spoon as investors choose to take profits after recent run.

De La Rue 824.5p (down 5.5p, 0.66 per cent)

Bank note printer retreats even as Goldman Sachs raises its price target to 840p from 750p.

Tate & Lyle 607p (down 1.5p, 0.25 per cent)

Sweetener-manufacturer drops despite its annual pre-tax profits beating expectations.