Should you sell out of, hold onto or buy even more shares in Australia’s big four banks?

The news certainly doesn’t look good.

Of the three banks that have reported recently – all three had bad news.

National Australia Bank (ASX: NAB) reported its third quarter results today and saw a 3% fall in cash earnings for the quarter, compared to the March quarter in 2015. While revenue was flat, higher funding costs are causing a drag on the group’s net interest margin (NIM) (the difference between the rate it earns on income and the rate it pays out). Bad and doubtful debt provisions rose 21% to $228 million.

Commonwealth Bank of Australia (ASX: CBA) also reported a fall in its NIM by 2 basis points or 0.02% to 2.07%, although the bank also saw its cash net profit rise 3% to $9.5 billion for the 2016 financial year. Cash earnings per share (EPS) and return on equity both fell thanks to the $5.1 billion capital raising the bank conducted last year. Cash EPS was $5.55 compared to $5.61 last year. CBA also reported a 27% increase in loan impairment expenses.

The Australia and New Zealand Banking Group (ASX: ANZ) reported a 3% fall in cash earnings to $5.2 billion for the nine months to end of June 2016 last week. NIM was stable despite the bank warning about increased funding costs and asset pricing competition. ANZ’s new CEO Shayne Elliot also warned that bad debts had been at cyclical lows and were returning to long-term averages.

Westpac Banking Corp (ASX: WBC) is not scheduled to report until October when it reports its full-year results, but investors can expect similar results along the lines of what the three banks above have reported.

But despite the bad news, the market appears to have taken the respective results in its stride, with NAB’s share price up 0.9% to $27.20 at the close, compared to a 0.2% rise in the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO).

What next for the banks?

It seems clear that the banks face a number of headwinds which we have warned about for some time now. There’s still the uncertainty over whether they will be required to further increase their capital ratios and raise even more capital, and they appear unlikely to be able to increase their earnings per share much at all in the near future.

Foolish takeaway

I’m not a buyer of any of the banks at their current prices for one simple reason. I want to beat the market’s average returns and I don’t think I could do that by buying bank shares now. Current shareholders might be happy to hold onto the banks given the still generous dividend yields, but those looking to beat the market might want to lighten the load and look elsewhere.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

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 Bruce Jackson.