The Commonwealth Bank of Australia (ASX: CBA) share price is not attractive, according to one fund manager.
Perennial Partners is a fund manager that has achieved long-term outperformance. Since March 2000, the inception of the Perennial Value Australian Shares Trust, this fund has outperformed the S&P/ASX 300 Accumulation Index (ASX: XKOA) by an average of 1.1% per annum.
This fund aims to achieve returns over the long term through a combination of capital growth and tax-effective income. It invests in a diversified portfolio of Australian shares and aims for a total return, after fees, that beats the S&P/ASX 300 Accumulation Index measured on a rolling three-year basis.
Over the prior three years, the fund's net returns have been 6.7% per annum, whereas the benchmark return was 5.6% per annum.
So what does the fund have to say about shares in Australia's largest bank?
CBA shares are not attractive to Perennial
In its monthly report for August 2022, the fund managed to outperform the index, after fees, by 0.1%.
Perennial pointed out that the major bank, in which the fund is underweight, lagged the market slightly, with the CBA FY22 result "highlighting the ongoing competition in the mortgage market".
However, the fund manager also pointed out that on the positive side of things, the balance sheet settings remain "very strong" across the sector and credit quality remains "pristine", reflecting the current underlying economic strength.
CBA is actually the position where the fund manager is most 'underweight'. That means compared to the index weighting of CBA shares, Perennial's holding of CBA in its portfolio is noticeably smaller.
In FY22, CBA reported that its cash net profit after tax (NPAT) rose by 11%.
But, it was the net interest margin (NIM) that suffered. The FY22 NIM fell by 18 basis points to 1.90%, or 10 basis points excluding 'liquids'.
CBA explained that the group NIM declined due to a large increase in low-yielding liquid assets and lower home loan margins. The bank said that its medium-term outlook remains "unchanged", with margins expected to increase in a rising interest rate environment.
The big bank also said that there is "continued pressure from home loan competition".
Improvement in the NIM could be a key driver of the CBA share price from here.
Management calls it a "challenging time"
When the company announced its FY22 result, the CBA CEO Matt Comyn said:
Against many measures, Australian households and businesses are in a strong position given low unemployment, low underemployment, and strong non-mining investment. However inflation is high, and we have seen a rapid increase in the cash rate which is negatively impacting consumer confidence. We expect consumer demand to moderate as cost of living pressures increase.
It is a challenging time, but we remain optimistic that a path can be found to navigate through these economic conditions. We remain of the view that the medium-term outlook for Australia is a positive one. Our purpose, to build a brighter future for all, reflects the role we play in supporting our customers and the domestic economy during periods of uncertainty.
We continue to invest in our business, to reinforce our customer propositions and extend our digital leadership position.
CBA share price snapshot
Over the last month, CBA shares have fallen by 2.5%.
