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Why I think dividend cuts from ASX bank shares are almost certain

ASX bank shares like National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) have been hit hard in this ASX bear market.

In fact, all four major ASX banking shares, including the beloved Commonwealth Bank of Australia (ASX: CBA), have fallen by more than the S&P/ASX 200 Index (ASX: XJO) since mid-February when this market crash began.

This has been especially damaging for ASX investors who invest for dividend income. The ‘Big Four’ are staples of almost every retiree or ASX dividend investor’s portfolio and have always been amongst the highest yielding ASX blue-chip shares on the market (as least as long as this writer can remember).

Of course, if the banks were under no pressure on the dividend front, then this wouldn’t really matter to most income investors. But in my opinion, the reason why the bank shares have fallen so heavily is the growing acceptance that dividend cuts are well and truly on the table.

In fact, I’m going out on a limb in saying that I think there is next to no chance all four ASX banks won’t be forced to cut their dividend payouts in 2020.

Why ASX bank shares are facing a perfect storm

I will acknowledge that the Federal Government and the Reserve Bank of Australia (RBA) are doing a lot to help the banks during this economic shutdown, including acting as a lender of last resort and as a loan guarantor.

But with interest rates at virtually zero now, these measures will only go so far and will be unable to stem the bleeding from the unprecedented lows that the banks can make from their spreads (the difference in interest rates between deposits and loans).

Another issue the ‘Big Four’ now have to deal with is the declaration from the New Zealand government that the banks’ Kiwi subsidiaries will be unable to send profits back home for the time being. That means even less cash available for dividend payouts.

One more thing the banks have to worry about is house prices. We don’t yet have a lot of information on how the coronavirus is affecting the Aussie property market, but it definitely won’t be helping! This is another huge concern for the banks, as most of the loans on their books are mortgages. If default rates rise as a result of this shutdown, it could add further pain to their balance sheets.

Foolish takeaway

From all of these factors, I think the question ASX dividend investors should be asking themselves is not if banks will cut dividends in 2020, but how much they will cut.

However, at their current share prices, a buy now could still lock in a substantial dividend yield, even if it’s not what their trailing yields are advertising. There is risk here, but a long-term dividend investor might still find some substantial value down the road!

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Motley Fool contributor Sebastian Bowen owns shares of National Australia Bank Limited. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.