• Profit Pushed Down by Provisions: While 1H26 net operating income rose to RM505 million, profit before zakat and tax fell due to higher credit impairment charges, overhead growth (including IT spending for the ATLAS app), and a high base effect from 1H25 recoveries.

• Asset Quality Under Pressure: Stage 3 impaired financing has risen for three straight periods, driven primarily by household loans and AKPK debt management exposures.

• Robust Capital & Liquidity Buffers: Total capital sits comfortably strong at 17.9% alongside a healthy Liquidity Coverage Ratio (LCR) of 160.3%.

• Sticky Funding Base: Government and statutory bodies supply nearly half (49.8%) of customer deposits, providing a stable, sticky operational funding source despite short-dated term deposit concentration.

• Overall credit remains sound. Existing investors are advised to hold, while new investors looking for short hold can consider the BMUAMK 5.330% 20Jul2032 Corp (MYR) Tier 2 sukuk (callable July 2027) with around 3.9% YTW.

About Bank Muamalat

Bank Muamalat Malaysia Berhad (BMMB) is a mid-sized, full-fledged Islamic bank with RM46.3 bil of assets at end-June 2026. It is the third-largest standalone Islamic bank in Malaysia, behind Bank Islam and MBSB Bank. It is owned 70% by DRB-HICOM (the conglomerate with 50.1% stakes in Proton) and 30% by Khazanah Nasional.

The franchise is consumer-led. Individuals account for 73% of gross financing, totaling RM34.7 bil, and consumer banking generated 66% of 1H26 revenue. Home financing (37% of the book), personal financing (23%) and hire purchase (10%) are the largest products.

The institution is rated as A2/ Stable by RAM and A+/Stable by MARC, both affirmed in July and August 2026.

Profit dragged by higher provision

Bank Muamalat's profit recovered from a provision-heavy 2024, but the 1H2026 dip shows how quickly earnings move with credit costs.

Table 1: Profitability ratio

In 1H26 net operating income grew RM505 mil, but overheads grew 18.2% to RM337.8 mil and credit impairment charges increased, so profit before zakat and tax fell. There was also a base effect, as 1H25 had unusually large recoveries. The cost rise partly reflects higher IT spending, including the ATLAS digital banking app launched in May 2026 (a Shariah-compliant savings account with financing products planned within the year).

Table 2: Changes in impairment

Net financing margin, the Islamic bank's version of net interest margin, is what the bank earns on its financing and investments less what it pays depositors, as a share of its earning assets. BMMB's margin held at about 2.02% through FY2025, then widened to 2.34% in 1H26 from 2.01% a year earlier. The bank attributes this to lower profit paid to depositors from a better funding mix (current and savings accounts rose to 32.5% of customer deposits from 29.8% a year earlier, while term deposits, which cost more, fell to 67% from 70%) and the 25 bps cut in the overnight policy rate.

Cost-to-income's ratio edged up in 1H26 to 60.7% from 59.5%, because overheads grew faster (18.2%) than income (15.8%). At about 60%, it is above Maybank, CIMB and Public Bank (35-50%) and close to smaller sizes bank like Affin Bank (63%) and Bank Islam (64.1%).

There's also a fraud-related incident in early 2025 that affected multiple banks including Bank Muamalat, after which about RM100 mil of BMMB's retail accounts were placed under AKPK debt management. The timing fits MACC's Op Sky probe (Jan 2025), in which a syndicate used forged lender cancellation letters to obtain simultaneous personal loans for indebted civil servants. Nonetheless, the amount is small relative to the RM34.7 bil financing book (about 0.3%), and management expects AKPK-related provisioning to ease in 2H26 as most of those accounts complete their repayment period, hence we find it manageable.

Financial health check

BMMB's earnings and capital have improved since 2024, while asset quality has weakened steadily.

Asset quality needs watching. Stage 3 financing (loans the bank classifies as impaired) has risen for three straight periods, driven by household loans, and coverage has fallen because Stage 3 balances grew faster than provisions, even after RM81.3 mil of write-offs in 1H26.

Coverage is lower partly because of what the impaired loans are. Most of them are home financing and business financing, which are backed by property or business assets, so the bank sets aside less against them than against unsecured personal financing.

Part of this pressure reflects an industry-wide uptick rather than an isolated issue, where the banking system's household impaired ratio ticked up to 1.11% in June 2026 (up from 1.03% at end-2025), driven by increases across key segments like personal financing and residential property.

However, Bank Muamalat’s ratios are notably higher, with its household impaired ratio reaching 1.72% against an Islamic banking sector average of 1.10%. While macro headwinds and industry trends play a role, the sharper rise at BMMB is also driven by its specific consumer customer mix and the ongoing resolution of the early-2025 AKPK debt management cases.

Management says it is managing asset quality through intensified recovery and collection efforts, and expects AKPK-related provisioning to ease in 2H26 as most of those accounts complete their repayment period. It has also slowed financing growth (4.6% in 2025, against 14.1% in 2024, and 1.8% in 1H26) and expects growth to shift towards business segments.

Table 3: Increase in stage 3 household loans

Table 4: Provision coverage for different segments

On the other hand, capital remains adequate. CET1 of 12.0% and total capital ratio of 17.9% gives headroom over minimum requirement set forth (CET1: 4.5%, total capital: 8%, capital conservation buffer: +2.5%).  No dividends were paid too for FY2024 or FY2025, hence earnings stay in capital which further uphold the ratio.

Table 5: Capital adequacy ratio

Funding is concentrated but stable. Government and statutory bodies supply almost half of customer deposits, a share that has barely moved relative to end-2025. Deposits from these bodies tend to be sticky, as they are typically placed for mandate and operational reasons rather than yield-chasing.

Even in an adverse scenario where part of this funding is withdrawn, the liquidity coverage ratio of 160.3% do provide some buffer. By product, about 67% of deposits are term deposits and about 33% are current and savings accounts (CASA).

Table 6: Customer deposits by depositor

Risks

• Consumer asset quality. A further rise in household impairments, especially in personal financing would push credit costs higher and erode thin coverage.

• Concentrated, short-dated funding. Term deposits make up 67% of customer deposits, and most of them (55% of the total) mature within six months, so funding costs reprice quickly. Government and statutory bodies also supply half of deposits. A withdrawal by a few large depositors would raise funding costs.

Our view

We see Bank Muamalat as an adequately capitalised issuer alongside its implicit support from the parent company, even as asset-quality pressures turn its credit trajectory mildly negative. The recent RM500 mil Tier 2 sukuk issued in May 2026 at 4.15% yield level also shows that market access is intact.

Hence, we recommend existing investors to continue holding, as the credit remains sound despite weaker asset quality. New investors can consider BMUAMK 5.330% 20Jul2032 Corp (MYR) for a short hold, as it is callable in July 2027 and its 3.89% yield is above CIMB’s similarly dated Tier 2 (3.66%).

Investors with a higher risk appetite can also consider BMUAMK 6.350% Perpetual Corp (MYR) at 4.92%, but should be mindful of the risks of an AT1.

We would not chase the BMUAMK 4.150% 26May2036 Corp (MYR), as its 4.31% yield to worst is around 60 bps below the 4.94% general yield level for similarly rated 5-year bonds.

Alternatively, investors can look at WCTHG 5.250% 18May2029 Corp (MYR) at 5.25% or EXCAPR 4.800% 17Jul2029 Corp (MYR) at 5.06%, both on our bond recommendation list and offering higher yields over a 2–3 year tenor.

Table 7: Bond list

Conclusion

BMMB’s 1H26 profit drop says more about provisions than about the strength of the bank. Its margin has widened, capital is comfortable, liquidity is adequate and ratings were affirmed this year, while the RM500 mil Tier 2 sukuk issued in May 2026 shows market access is intact. Consumer asset quality needs monitoring, in particular whether Stage 3 financing stabilises in 2H26.

On balance, we remain comfortable with BMMB as an issuer and recommend holding its sukuk, with the short-dated Tier 2 our preferred choice for new investors.