US Mid-Cap Banks "Previewing 2Q26 - The Catalyst for 2H Outperformance" Braziler

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US Mid-Cap Banks "Previewing 2Q26 - The Catalyst for 2H Outperformance" Braziler

US Mid-Cap Banks UBS Research

Largely one-sided catalyst set for 2H26

We view 2Q26 EPS as the first of several largely one-sided catalysts that should drive

further multiple expansion in 2H26. Consistent with our view, the group has largely

moved past the 1Q26 uncertainty, with valuations recovering to 10.5x FY27E EPS from a

recent low of 9.5x. We expect that outperformance to continue, driven by: (1) the

strongest loan growth in nearly a decade (Figure 9), (2) resilient deposit pricing, (3)

benign credit trends, (4) potential yield-curve re-steepening, and (5) improving M&A

activity. The group has also benefited during periods of rotation out of AI and

hyperscalers during 2Q, as investors seek its 6%+ combined shareholder yield. At the

same time, conviction is growing that banks will be AI beneficiaries, first through

efficiency gains and ultimately through their data and distribution advantages. Despite

the rebound, the group still trades at a 53% discount to the S&P 500—a gap we expect

to narrow. Our Top Picks heading into the quarter are BPOP and FLG.

More broadly, we favor self-help stories with improving fundamentals that continue

to trade at discounted valuations. VLY, FLG, ONB, and PNFP all fit that profile. We see

VLY as having the clearest re-rating path. Shares have already gained momentum in

2026, and we expect that to continue into 2H26 as funding mix and loan diversification

improve. ONB is arguably the highest-quality value name in all of our coverage, with

top-decile operating performance still valued at just 9.1x FY27E EPS. We expect

sustained NII/NIM performance and continued de-emphasis of near-term M&A to