Why Mid-Cap Banks Like Webster Financial (WBS) Are Outperforming Large-Caps in 2025: The Case for Loan Growth, Deposit Beta, and Undervaluation

In a banking sector marked by cautious optimism and structural shifts, mid-cap banks are emerging as standout performers. UBS's revised outlook for the second half of 2025 highlights a compelling narrative: institutions like Webster Financial (WBS) and Pinnacle Financial (PNFP) are outpacing large-cap peers due to a confluence of loan growth, deposit beta advantages, and undervaluation. These factors, combined with regulatory tailwinds and niche market focus, position mid-caps as a compelling play for investors seeking long-term value.

Loan Growth: The Power of Niche Markets

Mid-cap banks have leveraged their agility to capitalize on demand in underserved sectors. UBS projects mid-cap banks to grow loans at a 4.5% annualized rate in 2025, a stark contrast to the “roughly flat” growth expected for large-cap banks like Comerica (CMA). This outperformance is driven by a focus on commercial and industrial (C&I) lending, particularly in regions like the Southeast, where small- and mid-sized businesses require tailored financing.

Take Webster Financial, for instance. Its Q4 2024 net interest margin (NIM) of 3.39% reflects strong loan growth and disciplined credit underwriting. UBS has raised its 2025 earnings per share (EPS) estimate for WBS by 4%, citing its ability to scale in niche markets. Pinnacle Financial, another standout, reported 4.6% year-over-year loan growth in Q1 2025, underscoring the sector's momentum.

Deposit Beta: A Margin Resilience Edge

The Federal Reserve's pivot to rate cuts has created a critical advantage for mid-cap banks. With an average deposit beta of 53%, these institutions adjust deposit costs at half the pace of interest rate changes, preserving net interest margins (NIMs) during tightening or easing cycles. Large-cap banks, constrained by rigid cost structures and customer concentration, struggle to match this flexibility.

Webster Financial exemplifies this strength. Its conservative balance sheet and aggressive deposit repricing allowed it to maintain a 3.39% NIM in Q4 2024—a figure UBS expects to stabilize or grow in 2025. In contrast, Comerica's NIM remains flat, with 2026 EPS still 10% below consensus, reflecting structural challenges.

Undervaluation: A Catalyst for Re-Rating

Mid-cap banks trade at significant discounts to intrinsic value, creating a margin of safety for investors. UBS's analysis suggests Webster Financial is undervalued by over 20% using its InvestingPro Fair Value model, while Pinnacle Financial's 18.86% Common Equity Tier 1 ratio and low non-performing loan (NPL) levels further bolster its appeal.

Pinnacle's Q1 2025 net income rose 5.4% despite seasonal deposit headwinds, driven by NIM expansion and cost discipline. UBS assigns a $100+ price target to PNFP, citing its strong capital position and growth potential. Large-cap banks, meanwhile, trade at overvalued multiples relative to their risk-adjusted returns.

Strategic Positioning for H2 2025

UBS's strategic outlook for mid-caps hinges on three pillars:
1. Regulatory Tailwinds: Banks nearing the $100 billion asset threshold may benefit from potential revisions to the Federal Reserve's Large Financial Institution (LFI) rules, reducing compliance costs.
2. Margin Expansion: Mid-caps' focus on cost management and niche lending allows them to outperform in a normalizing yield curve environment.
3. Valuation Discounts: A 20%+ undervaluation in names like WBS and PNFP creates a compelling risk-reward profile.

UBS has raised its 2025 EPS estimate for WBS by 4% and maintains a $68 price target, while PNFP's 3.92% NIM and conservative balance sheet make it a cornerstone for long-term investors.

Actionable Investment Opportunities

For investors, the case for mid-cap banks is clear. Key recommendations include:
- Webster Financial (WBS): A 20% undervaluation, 4.5% loan growth, and 3.39% NIM make it a top pick.
- Pinnacle Financial (PNFP): A $100+ price target and 18.86% capital ratio offer downside protection.

The sector's outperformance is not a flash in the pan but a structural shift driven by agility, margin resilience, and valuation. As UBS notes, mid-caps are well-positioned to capitalize on 2026's expected cyclical rebound, with 2025 serving as a setup year.

In a banking landscape dominated by macroeconomic headwinds, mid-cap banks like WBS and PNFP stand out as rare opportunities. Their focus on niche markets, deposit beta advantages, and undervaluation creates a compelling case for a sector re-rating. For investors with a medium-term horizon, these institutions offer a path to outperforming the broader market.