Listed bank stocks are back in favour with investors after a five-day rally that has seen the ASX financials index surge almost five per cent.While banks have underperformed most other industry sectors in the last year, the June recovery has wiped out most of the capital losses accumulated by financial stocks over the past 12 months.In the five trading sessions to Wednesday evening, the financials index posted total gains of 4.67 per cent.The recovery has reduced 12-month losses for the sector to 4.5 per cent - a remarkable turnaround given the steady flow of hideous news that has swamped the industry during the period.The turnaround means that the financials index is no longer the worst performing sector on the ASX.That mantle has been claimed by the listed telecommunications industry.Only a handful of financial stocks lost ground on Wednesday, most notably Yellow Brick Road, which slipped to a record low of nine cents on heavy turnover.Analysts are questioning whether the company's reliance on commission-based revenue streams can withstand the expected wave of re-regulation expected to hit the financial advice and mortgage broking industries.However, the four major banks and Macquarie are leading the sector's resurgence.Each of the majors rallied by at least two per cent on Wednesday, with CBA, Westpac and ANZ posting gains of almost three per cent.Regional banks also improved led by Bendigo and Adelaide Bank, which rose 2.4 per cent.Goldman Sachs analysts recently slapped a "buy" recommendation on the Victorian-based regional.The negative sentiment prevailing over the sector in the last year has resulted in a string of institutions reducing their investments in Australian banks.Global fund manager Vanguard is the latest institutional investor to rein in its exposure to the sector after notifying the ASX this week that it was no longer a major shareholder in ANZ.Other offshore investors have been actively pruning their exposures to major Australian banks in recent months.They include Invesco and The Teachers Retirement System of the State of Kentucky, which each offloaded most of their respective interests in Westpac in March.The Seattle-based Parametric Portfolio Associates pruned its interest in CBA in April.