The performance of GCC banks in the first three months of the year shows Saudi institutions are still feeling the effects of the collapse of regional stock markets two years ago.

Average profit growth in the first quarter of 2008 was just 2 per cent in Saudi Arabia, compared with the same period last year. In the UAE, the banks that have reported so far have had average growth of more than 30 per cent. Qatari banks are doing even better, averaging 52 per cent growth.

The Saudi banking sector has already been overtaken in size by the UAE, which has shaken off the impact of its own stock market crash to return to impressive growth levels.

Huge Saudi financial institutions such as Al-Rajhi, National Commercial Bank and Samba are struggling to increase their profits as quickly.

In part, Saudi banks have themselves to blame. Companies in the kingdom are tiring of the negative attitude many local banks have shown towards their financing requests, providing an opportunity for more responsive competitors.

Across the region, the best performances have been recorded by smaller institutions, which are growing fast. But the strong performance of larger banks such as Qatar National Bank and National Bank of Kuwait shows that even established banks can still produce above-average growth.

The real test for the regionís banks is yet to come. The credit crunch and lack of dollar liquidity will deter capital market activity and make deals more difficult to complete, while inflation will drive up costs and eat into profit margins.

Unless they can start growing as fast as their competitors in neighbouring countries, Saudi banks risk losing out in the race to be the major regional banking brands.