Lloyds share price recovery derailed by Omicron variant and could provide buying opportunity

The Lloyds share price was trading a whisker away from 52-week highs last week on optimism the Bank of England would provide the higher rates needed to increase Lloyds’ Net Interest Margin.

However, fast forward a week and Lloyds shares are now well below recent highs as the market digests the impact of the new coronavirus variant, Omicron.

Following a raft of strong economic data, Lloyds shares had climbed higher on the anticipation the Bank of England would hike rates in December and was trading consistently above 50p.

Last week, we wrote with the prospect of a rate hike, Lloyds shares had the potential to break out and revisit pre-pandemic highs.

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With the discovery of the Omicron variant, the Lloyds rally has been derailed in the short term, but it could be the opportunity investors are looking for to buy Lloyds shares for a longer term hold.

Fundamentally, nothing has changed for Lloyds. Inflation still persists and anny economic slowdown is likely to be brief.

This means a rate hike is still very much on the cards and demand for Lloyds products such as mortgages will remain robust. One would expect the impact of Omicron on Lloyds earnings to be minimal.

Early reports suggest Omicron to a be mild, however vaccine bosses have warned over the efficacy of current vaccines on the new variant.

This will lead to market volatility on further medical updates on Omicron and investors will continue to face sharp moves to both the upside and downside.

Lloyds shares

With Lloyds shares trading at 47.6p, they have a historical PE of 23x and forward earning multiple of 5.7x. A forward earnings would suggest Lloyds is undervalued, if the earnings forecasts are meet.

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Indeed, if Lloyds shares were to trade at 15x these forecast earnings it would mean the Lloyds share price triples from here. This, however, is unlikely as earnings multiples haven’t been the most relevant valuation metric for UK banks over the past few years.

The market has priced UK banks consistently on a price-to-book basis. Lloyds currently has a price-to-book of 0.7 which is the highest of the FTSE 100 UK-focused banks.

Whilst this may make Lloyds shares seem expensive when compared to their peers, it also suggests the market has a higher opinion of the quality of Lloyds assets, such as loans and mortgages.

This will be key for the Lloyds share price because a high quality asset basis will deliver earnings growth in the future.

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