Bahrain’s banks are posting profit growth for the first nine months of this year, but both the country’s retail and wholesale banks are still vulnerable to certain risks.

GFH, the Bahrain-based Islamic investment bank, returned to profit in the third quarter compared with a loss recorded in the same quarter last year.

Its profits jumped to $15.6m for the first nine months of the year from just $1m recorded in the same period last year.

Ahli United Bank, one of Bahrain’s largest lenders, also reported profit growth by the end of September this year. Net profits rose by 30 per cent in the first nine months to reach $376.3m from $289.3m in the same period last year.

Arab Banking Corporation (ABC) saw its profits increase by 11 per cent to $197m from $178m for the first nine months.

However, the banking sector still faces some constraints and has increasing competition from banks in the financial hubs of Doha and Dubai.

Bahrain’s total bank assets fell to 5.8 times the country’s GDP in 2013, down from 11.3 times in 2007, according to report from ratings agency Moody’s Investor Services in November.

Total bank assets, both retail and wholesale, reached a peak of $252.4bn in 2008, before falling by 26 per cent to $186.32bn in 2012, according to Central Bank data. The banking sector was very exposed to the collapse of Bahrain’s, and the region’s, housing sector.

Since then, financial institutions have been repairing balance sheets and there has been some consolidation in the sector, with a number of bank mergers in the Islamic bank market.

Total assets are now rising again, reaching $192bn in 2013, and climbed by close to another 1 per cent by the end of August to $193.6bn.

The strengthening banking sector has been recognised by rating agencies this year, with Moody’s revising the outlook for the retail banking sector from negative to stable in early 2014.

Bahrain’s banks are expected to benefit further from the planned investment in infrastructure, with an estimated $22bn-worth of projects being developed in the Gulf country in the coming years.

Although the government of Bahrain plans to ramp up spending, the creditworthiness remains constrained by the country’s ongoing political instability, Moody’s stated.