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Should you buy ASX banking shares after a dividend cut?

ASX banking shares are under pressure in 2020, with APRA pressuring the banks to cut dividends. 

The Aussie banking regulator has said the banks should “seriously consider” their planned distributions this year. In fact, the banks would need to justify why they are paying out to shareholders this year if they do push ahead with dividend plans.

All of these measures are designed to manage the coronavirus pandemic. Businesses and individuals are hurting with the economy at a near standstill. The Aussie banks are being asked to step in and help, which is good for Aussies, but could hurt shareholders.

But could a dividend cut actually put ASX banking shares in the buy zone?

Why ASX banking shares could be cheap right now

The largest ASX banking shares could be in the buy zone right now. The Westpac Banking Corp (ASX: WBC) share price is down 41.12% in 2020. That’s a big drop in the space of just 4 and a bit months and could be unjustified.

Westpac shares are currently yielding 11.41% per year. While a dividend cut seems almost certain at this point, it’s important to realise why the cut is happening.

It’s not that the banks don’t have the cash to pay to shareholders. It’s regulatory driven, which means that Westpac could reinstate its dividends after the uncertainty passes.

ASX banking shares are falling lower as banks are asked to wear some of the COVID-19 stress. But that means underlying business performance could actually pull through in good shape.

It’s a similar story for other large banks like Commonwealth Bank of Australia (ASX: CBA). CBA shares are yielding a tidy 7.21% and the bank just paid out $3 billion to shareholders last week.

That could arguably make Commonwealth Bank shares a better value buy and they’re down 25.14% in 2020.

But the dividend cut could be a turning point

Shareholders have sold out of ASX banking shares in 2020. Any dividend cut could force their share prices even further if it’s not already priced in. 

One other thing to consider though is this could be a turning point. Some analysts are predicting a more conservative capital management future for the ASX banks. That means the large dividends that we’re used to might drop off once the pandemic has passed.

Foolish takeaway

No one has a crystal ball, but we can make educated guesses. If the banks are in good financial shape, I think a steep discount on Commonwealth Bank or Westpac shares could be too good to ignore in 2020.

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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.