It has not been pretty. The MSCI banking index, which captures the share price performance of 178 banks worldwide, has lost nearly a third of its value over the past year.

Gulf banks, on the other hand, have largely managed to sidestep the credit crunch, which has hurt earnings so badly, thanks to strong domestic economies but also in part because of conservative management.

The Qatari banking sub­index is up nearly 50 per cent over the past year; Kuwaiti banks are flat; Omani banks have gained 44 per cent; and Abu Dhabi’s banking sector has risen nearly a third, according to Zawya, a data provider.

While complex debt instruments and structured investment vehicles were popular with US and European investment banks, Gulf banks by and large avoided complex products they did not understand. “Sometimes ignorance is the best way to be profitable,” says Beshr Bakheet, head of Bakheet Investment Group.

According to Zawya, net profit of the 20 largest listed banks grew 22 per cent to $8.68bn in the first six months of the year as total assets rose an annual 40 per cent to $649.2bn.

Adding to the attraction of banking stocks is the fact that many of the region’s large real estate companies and virtually all the Gulf’s petroleum companies remain in private hands or are government-owned.

Banks offer “possibly the best general exposure” to regional equities, says Walid Shihabi, head of research at Shuaa Capital.

The performance of the banking sector and of the wider stock market are highly correlated over time, largely because banking stocks form such a large proportion of total capitalisation. According to Moody’s, the ratings agency, banks represent nearly a third of the region’s total $1,065bn market value.

But financial shares have dipped recently. Saudi and Omani banks have been worst hit, while Qatari bank stocks have continued to overperform the market, according to Tammam El Barbir, an analyst at Morgan Stanley.

Mr Barbir expects banks in Qatar to continue to do well, along with financial institutions in the United Arab Emirates, and Abu Dhabi in particular, boosted by loan growth and healthy economies.

Overexposure to real estate remains a worry, particularly in the UAE. A currency peg to the dollar in most countries hamstrings monetary policy (see Viewpoint above) and means that central banks use other tools to curb inflation, such as increasing reserve requirements to rein in lending growth.

Funding costs are also rising. Low interest rates make it difficult to attract deposits. International debt markets are sluggish, and the local currency interbank rates have risen as demand outstrips supply of capital.

But with stock valuations coming down with regional indices, banks still offer a good way to tap into a growth story that has some way to run.