Jan. 28 (Bloomberg) -- U.S. and European bank stocks rose on speculation the Obama administration’s plan to absorb toxic assets will stabilize lenders’ balance sheets. Wells Fargo & Co. soared 31 percent after saying it doesn’t need more federal aid.

Citigroup Inc. and Bank of America Corp., which had both lost about half their value this year before today, gained 19 percent and 14 percent, respectively. Frankfurt-based Deutsche Bank AG climbed 23 percent and London’s Lloyds Banking Group Plc surged 50 percent.

Bank shares have slumped this month on speculation companies would write down more assets and need new capital injections, raising concern government intervention would wipe out any remaining shareholder value. The Obama administration’s plan may instead set up a so-called bad bank to absorb the hard-to-value holdings that have prevented many lenders from making new loans.

“The fact that they laid out a good bank/bad bank scenario means the nationalization of Citibank and Bank of America that people are worried about is less of a possibility,” said Warren Koontz, head of large-cap value stocks at Loomis Sayles & Co. in Boston. “The rolling fear that started with Citigroup and spread to Bank of America seems to have stopped for now.”

The KBW Bank Index of 24 U.S. banking companies climbed 14 percent, trimming this year’s decline to 26 percent.

Dividend Relief

San Francisco-based Wells Fargo, which also said today it would leave its dividend unchanged, gained $5 to $21.19. New York-based Citigroup and Bank of America, with its headquarters in Charlotte, North Carolina, both lowered their quarterly payouts to shareholders to 1 cent a share earlier this month.

While competitors reduced their lending in the quarter, Wells Fargo added $50 billion in mortgage originations and has $22 billion in new loan commitments, the company said today in announcing a fourth-quarter loss of $2.55 billion. Excluding one- time items, the profit of 41 cents a share beat the average estimate of 33 cents among analysts surveyed by Bloomberg.

Citigroup rose 66 cents to $4.21 at 4:20 p.m. in New York Stock Exchange composite trading, while Bank of America advanced 89 cents to $7.39. Morgan Stanley, the second-biggest securities firm until it converted to a bank last year, gained 18 percent to $23, the highest price since October.

The Federal Deposit Insurance Corp. may manage the Obama administration’s proposal for a “bad bank,” buying distressed assets that are clogging balance sheets, two people familiar with the situation said.

Bank Catalyst

“A catalyst for banks everywhere is the expected announcement out of the U.S.,” said Simon Willis of NCB Stockbrokers Ltd in London. “We are seeing a rebound after a sharp selloff in banks last week.”

European stocks were helped by a newsletter that said Deutsche Bank had a “sensational” start to 2009. Germany’s biggest lender may earn almost 1 billion euros ($1.3 billion) in pretax profit in January, Der Platow Brief reported today. The shares rose to 21.94 euros in Frankfurt.

Lloyds gained the most in at least two decades to 100.9 pence after Citigroup analysts led by Tom Rayner in London raised it to “buy” from “hold.” The possibility of nationalization “is more than adequately discounted in the current valuation,” Rayner said in a note today.

Lloyds Banking, formed by Lloyds TSB Group Plc’s takeover of HBOS Plc this month, is seeking to avoid an increase in the government’s 43 percent stake. Lloyds’ shares have declined 20 percent this year.

‘Dramatically Undervalued’

“The immediate worry of nationalization and recapitalization is slowing beginning to ebb away,” said Michael Trippitt, a London-based analyst at Oriel Securities Ltd. who has a “buy” rating on Lloyds. “Lloyds has been dramatically undervalued for some time,” and the revenue benefits and cost savings from the HBOS deal are “still understated,” he said.

Barclays Plc has more than doubled this week, and climbed to 107 pence in London today. The company lost almost half its value last week as investors speculated that the London-based company would need to raise money from the U.K. government or be nationalized. Barclays said Jan. 26 that it has 17 billion pounds of surplus capital and can use profit to offset about 8 billion of writedowns in 2008.

To contact the reporters on this story: Jon Menon in London at jmenon1@bloomberg.net; Andrew MacAskill in London at amacaskill@bloomberg.net.

Last Updated: January 28, 2009 16:36 EST