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Why an ASX bank dividend cut could put banking shares in the buy zone

It’s looking more and more likely that we will see a collective ASX bank dividend cut. The large banks in New Zealand and the UK are being asked to conserve cash amidst the coronavirus crisis.

But should you let a bank dividend cut deter you from buying ASX banking shares in 2020?

Why are we expecting a bank dividend cut in 2020?

This all really comes from the novel coronavirus pandemic sweeping the globe. Businesses are being forced to shut down left right and centre in order to control the spread of COVD-19.

In turn, the banks are being asked to help bear some of the pain. One of the big problems in the 2008/09 GFC was that the banks essentially stopped lending.

A combination of struggling businesses and little access to money isn’t a good one. In contrast, things seem to be a little better this time around.

But that means that we could well see an ASX bank dividend cut in 2020.

The Reserve Bank of New Zealand recently put a freeze on Kiwi bank dividends to help free up liquidity and maintain the strong balance sheets of the banks.

The Aussie banking regulator, APRA, initially took a different approach. APRA said it would leave dividend decisions up to individual boards, but is now urging the banks to “seriously consider” slashing dividends.

Given the current environment, it looks like we will see an ASX bank dividend cut. And as is the way in Aussie banking, it could be a “one in, all in” situation.

But even if the banks do slash dividends, should you let it stop you from buying banking shares?

Should you still buy ASX banking shares?

I think if anything, an ASX bank dividend cut could be an extra reason to buy ASX banking shares in 2020.

If you’re a buy and hold investor, missing one year of dividends is not the end of the world.

Commonwealth Bank of Australia (ASX: CBA) shares are currently yielding 6.97%. Even better, Westpac Banking Corp (ASX: WBC) shares are paying 10.81% per annum.

But missing one year of dividends shouldn’t matter too much over a 1o or 20-year investment horizon. CBA and Westpac shares are down 22.57% and 33.55% in 2020, respectively.

That means that it could be a great buying opportunity if investors are mispricing an ASX bank dividend cut in 2020.

Foolish takeaway

I think the key is looking at why there could be an ASX bank dividend cut in the first place. If it was due to cash shortages at the banks, that may be an issue.

But when it’s regulator-driven, rather than an inability to pay, I don’t think it really affects the long-term value of ASX banking shares.

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Motley Fool contributor Ken Hall has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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.