Some banks have chosen to discount the falls in profits in 2007 as anomalies associated with exceptional events that have included the region’s stock market collapses in 2006 and the sub-prime crisis.

They argue that ‘core growth’, including corporate and retail incomes, is strong. This, they say, is a more accurate indicator of bank performance than the exceptional falls and gains resulting from the extreme swings in the region’s stock markets in 2005 and 2006.

But the banks are wrong to ignore the problems that have led to plummeting profits. Over-dependence on stock market gains led to a 14 per cent collapse in profits in Saudi Arabia in 2007.

In the same year, UAE banks also overtook the kingdom’s in terms of asset growth and outperformed on return on assets, at 2.8 per cent compared with 2 per cent in Saudi Arabia.

The Gulf’s worst-performing banking sector of 2007 was Bahrain. Ironically, the problems were caused by the country’s long-praised exposure to global markets and structured products that the region’s more insular markets do not have. As a result, banks such as Gulf International Bank, Gulf Investment Corporation and Arab Banking Corporation have reported huge losses, expected to run into billions of dollars.

Great challenges lie ahead for the region’s banks as inflationary effects reduce customer deposits, make loan defaults more common, and make corporate clients less profitable.

There are also warnings against over-exposure to the real estate sector, with some central banks limiting loan values. It is also quite certain that the region’s stock markets will not return to the unsustainable highs that preceded corrections across the Gulf.

Banks must ensure a broad spread of income and only take risks that are proportionate to their investment incomes, or risk having a disappointing 2009.