Bank Islam's pivot to profitability over volume in the digital era

KUALA LUMPUR: It is not always that one sees a former digital bank's chief executive joining an incumbent bank, let alone two, within the space of a few months.

Therefore, the appointment of former chief executive officer (CEO) of Aeon Bank, Datin Paduka Raja Teh Maimunah Raja Abdul Aziz, as well as former CEO of Ryt Bank, Melvin Ooi, to lead Bank Islam Malaysia Bhd attracts the attention of those within the industry.

How would Raja Teh, who also hailed from Ambank Group prior to her stint at Aeon Bank – she was the CEO of AmInvestment Bank and managing director of the group's wholesale banking – drive Bank Islam forward in an era of digitalisation, alongside Ooi?

For Raja Teh, chasing loan growth for the sake of expansion will no longer be the game for Bank Islam. The bank is actively recalibrating its focus toward sustainable profitability, digital transformation and an enhanced customer experience.

"Our past strategy has been to drive up our balances and our assets. Now, our focus is to look at profitability. So, not necessarily the volume of the assets, but the quality from a profitability perspective," said Raja Teh in an exclusive interview with Business Times.

While the bank saw robust gross financing growth of 7.5 per cent year-on-year (YoY) to RM77.9 billion in the first half of 2026—bringing total assets to RM106.7 billion—management is actively recalibrating to ensure these assets generate sustainable returns.

To measure this shift, the bank has established strict internal targets.

For the first half of 2026, Bank Islam's annualised return on equity (ROE) stood at 6.3 per cent. The leadership views this as a baseline that must be aggressively improved upon over the medium term.

"We need to hit double digit ROE at least in the next five years. We are now at single digit. So that to me is the absolute north star," said Raja Teh.

NO RACE TO THE BOTTOM FOR BANK ISLAM

To do so, Raja Teh said that she is willing to "let go" of businesses that do not meet the necessary internal profitability targets and risk-adjusted pricing standard, particularly in the highly competitive retail sector.

She emphasised that Bank Islam will not blindly follow market price wars just to accumulate loan growth.

However, this does not mean abandoning entire segments outright, said Raja Teh. Instead, the bank intends to be highly selective, deliberately avoiding a "sweeping" approach to retail lending.

The overarching principle driving this shift is "risk-based pricing," ensuring that capital is only deployed when the return adequately compensates for the underlying risk of the asset.

"There are some retail assets that are very competitive today. So we have to really think about how we price those assets. Not necessarily let go but say not sweeping everything within that segment.

"I mean just because you want to grow your asset book and then you take on an asset that has got poor returns, I don't see the point of that," said Raja Teh.

Bank Islam's strategic retreat from aggressively priced, low-yielding retail assets aligns directly with current macroeconomic pressures facing the Malaysian banking sector.

Malaysian banks are facing intensified funding competition and rising deposit costs, which directly squeeze lending margins. Bank Islam's net financing margin, or net interest margin (NIM) for conventional banks, had narrowed in the past down to 2.08 per cent.

In the first half of the financial year ending June 30, 2026 (1H FY26), Bank Islam's NIM improved to 2.12 per cent.

According to a September 2026 sector report by MBSB Research, most deterioration of asset quality is seen in the retail portfolio, as elevated cost pressure has plagued the average Malaysian over a prolonged period.

Bank Islam's household loan portfolio is an area requiring closer monitoring, as it had worsened faster compared to the post-pandemic period.

"We think some of it is the accumulation of non-packaged loans post-pandemic, which has led to further weakness in Bank Islam's loan portfolio," MBSB Research said in the report.

The retail market remains fiercely competitive, with some competitor banks offering Islamic home financing rates as low as 2.75 per cent to 2.88 per cent.

Bank Islam's standard offerings, such as the Baiti Home Financing-i, have higher starting rates of around 3.55 per cent, reflecting their conscious decision not to participate in the race to the bottom for retail market share.

IMPROVING COST-INCOME RATIO BY GROWING TOPLINE

Simultaneously, the bank is addressing operational efficiency. Driven by necessary investments in information technology infrastructure and talent acquisition, overhead expenses have required careful management, said Raja Teh.

"So, we are now at 67 per cent (cost-to-income ratio). That's very, very high. We definitely need to reach at least 55 per cent in the next three to five years," she said.

However, improving the cost-to-income ratio (CIR) to 55 per cent does not mean that Bank Islam will embark on cost-cutting measures. Instead, Raja Teh would like to improve the income denominator of the ratio.

She is hesitant to enforce strict cost-cutting measures because the bank is in a transformative phase that requires capital. The bank must continue to spend—particularly on digital platforms, architecture modernisation, and technology to automate processes—in order to scale, she said.

The bank plans to grow its topline income not just by growing traditional financing, but by diversifying into non-retail, transactional, and fee-based businesses, such as debt capital markets and wealth management.

Bank Islam is significantly expanding its non-fund-based income. The bank aims to elevate this fee-based business from the current base of around 10 per cent of income, with a long-term sight set on the industry average of 30 per cent.

This requires a deliberate push beyond traditional consumer lending, said Raja Teh.

"Moving forward, we want to do more than financing. We want to do more fee-based businesses, more transactional types of businesses, and diversify from just our retail business into non-retail," she said.

A core pillar of this diversification is the institutional market. "That is a very big part of our strategy – the development of our investment banking franchise, specifically on our debt capital markets," she said.

Raja Teh highlighted Bank Islam's growing presence in debt capital markets (through Sukuk issuances) and the expansion of its stockbroking and asset management companies.

Additionally, the bank is developing a wealth franchise targeted at its unique, Shariah-conscious customer base, as well as launching bespoke private credit market mandates to match institutional funds with corporate clients.

"We have a stockbroking company, as you may know and we're going to expand the business of our stockbroking company. We have an asset management company. Still small. Again, we brought in some heavyweights leadership. And we hope to grow that as well," said Raja Teh.

Bank Islam is also growing its private credit market mandate, she said, servicing the credit needs of some of the institutional clients and funds.

INCREASING RISK APPETITE FOR COMMERCIAL PUSH

This commercial push is supported by Bank Islam's healthy balance sheet.

Bank Islam is the payroll bank for the government, affording it a highly stable foundation via direct salary deductions for civil servants. Because of this, the bank's gross impaired financing ratio stood at 0.98 per cent at the end of June 2026, well below the industry average of 1.43 per cent.

This strong credit profile gives the bank the latitude to cautiously test underpenetrated segments.

"We'll move our needle maybe by 20, 30 bids in terms of risks," said Raja Teh. "So we want to go into segments that we've never been before. Maybe the smaller businesses that we've not financed before".

Acknowledging an intense and costly competition for retail fixed deposits in the banking sector, Raja Teh plans to pivot toward corporate cash management solutions.

By helping corporate clients manage their daily operations—such as supplier payments, customer collections, and payroll—Bank Islam aims to capture low-cost operational deposits to naturally moderate overall funding costs.

"So today there's always a war on retail deposits.

"So the key thing for us is not to depend on those kinds of deposits only but we also have to look into providing, how would I say, cash management solutions to our customers so that when their money passes through us it's not because they give us money," said Raja Teh.

"That will help us moderate the deposit cost but generally it is not cheap. You can see deposit rates are much higher than the overnight policy rates; 100 bps above for retail deposits," she said.

Ultimately, this comprehensive overhaul serves a single commercial mandate: maximising value for all investors, including anchor shareholders like Lembaga Tabung Haji, while operating as a highly competitive entity.

"Our shareholder is not just Tabung Haji. We have other shareholders. Half of our shareholders are other people as well. So, you know, there's no added pressure or anything like that. It's an expectation on all of us," said Raja Teh.