Credit Suisse, in its latest report, said that the banking sector is witnessing an increase in liquidity surplus while the loan growth continues to remain weak.

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According to the report, in its recent financials field trips, all the banks Credit Suisse met highlighted weakening loan demand and rising liquidity surpluses. HDFC Bank and the State Bank of India have excess liquidity of $7 billion and $15 billion, respectively, said the report.

The banks are cutting deposit rates aggressively — HDFC Bank has cut the deposit rate by 100 bp since June. However, CS said that with falling LDRs and drop in MCLR, bank NIMs are likely to come under pressure.

While the credit businesses are still facing challenges, Credit Suisse is maintaining an 'outperform' call on three banks — HDFC Bank, ICICI Bank and SBI as "their distribution businesses are continuing to do well".

"SBI’s/HDFC Bank’s planned stake sales in these businesses will also release capital and provide more visibility to their SOTP valuations. We raise our SOTP (sum-of-the-parts valuation) valuations for ICICI Bank/SBI/HDFC Bank on the increased value of AMC and insurance businesses," said CS.

All the three stocks are up between 20 percent and 40 percent YTD.