Operating conditions could scarcely be more benign. The trickle-down effect of two years of sky-high oil prices has become a flood. Corporates are joining retail customers in the queue to see the bank manager and long-delayed projects, public and private, are moving forward, creating healthy demand for funding. And the increase in demand for a more diverse range of financial products and services has coincided with growing sophistication among the region's larger institutions. The development of fee-based income streams has in turn helped banks get out from under the one major cloud on the regional banking horizon - the import from the US of sustained low interest rates.

The interim results make happy reading. Profits at the five largest GCC banks to have published results came in at $1,360 million in the first half (H1) of 2004, up by 60 per cent from the H1 2003 figure. The increase is inflated by the extraordinary income reported by Arab Banking Corporation (ABC), which booked the sale of overseas assets in Spain and Hong Kong, but is nevertheless impressive. Loan books are expanding fast among the heavyweights - by 20.3 per cent at Gulf International Bank (GIB), by 17.9 per cent at National Bank of Kuwait (NBK) and by 15.5 per cent at Samba Financial Group over the first six months alone. Loan/deposit ratios are overwhelmingly on an upward trend.

Interest rates have been stubbornly low for nearly three years, as the US has attempted to jump-start its flagging economy, creating narrow margins on conventional lending in the Gulf. However, as US growth has accelerated in 2004, the Federal Reserve (central bank) has begun inching up interest rates, beginning with increases of 25 basis points (bp) in the second and third quarters. GCC central banks have been quick to follow suit. The Central Bank of Kuwait raised the base rate by 50 bp in early August and further increases are anticipated. Banks are looking on with glee as the promise of fattening spreads beckons.

Also watched with glee is the constant upward revision of oil market forecasts for demand and, consequently, prices. A year ago, analysts were virtually unanimous in presaging a price slump around the corner. The consensus now is that a thin capacity cushion, coupled with rampant Chinese and US demand, will support prices throughout 2005. So the warm macroeconomic climate and booming private sector should be sustained for at least another year, and with it the burgeoning call on the banks' services.

Retired bankers 20 years from now may regale their grandchildren not only with tales of a profits bonanza but with reflections on a period of profound change in the regional banking landscape. Long-awaited reforms are beginning, slowly, to come to fruition. Kuwait decided in early 2004 to open the door to foreign banks and in August, BNP Paribas became the first lucky recipient of a licence. Others are waiting in the wings. Initially the international banks will be permitted only a single branch and are unlikely to threaten local franchises, but the move marks the end of a 20-year blockade.

Similarly in Saudi Arabia, fresh competition is looming. A flurry of new licences were granted to regional banks in 2002/03 and several international banks are awaiting approval for their applications. On the home front, a new competitor is about to emerge in the form of Al-Bilad Bank, the product of a merger between eight local foreign exchange h