Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.

(Updated )

Investors in Singapore banks are chasing mirages in the desert.

Since the election of Donald Trump as U.S. president, shares of DBS Group Holdings Ltd. are up 21 percent, Oversea Chinese Banking Corp. has rallied 11 percent and United Overseas Bank Singapore has gained 12 percent. Much of the run has been based on hopes that higher rates in the U.S. and Singapore would flow down to the bottom line. It's not happening, simply because lenders are too scared to make the most profitable loans.

A round of restructurings and bankruptcies in the oil and gas industry has pushed the nonperforming loan ratio at the nation's three biggest banks to multiyear highs. On Tuesday, during OCBC's earnings call, Chief Executive Officer Samuel Tsien made it clear the end is not in sight.

Phantom Limb
The sight of nonperforming loans rising to the highest in five years is holding back Singapore banks
Source: Bloomberg

Afraid of further losses and reeling from growing impairments, loan growth at the three banks has slowed to a crawl. In the case of OCBC, assets actually shrank for three consecutive quarters last year before recovering in the final three months.

Shrinking Giants
Loan growth was either negative or very low for most of last year at Singapore's biggest banks
Source: Bloomberg

Even when loans are created, banks aren't making much more money from them. Net interest margins either dropped or barely increased for the big three last year. In the case of DBS, which reported full-year results on Thursday, the margin dropped to 1.71 percent from 1.84 percent a year earlier. UOB said on Friday that its net interest margin was 1.69 percent in the fourth quarter, 10 basis points lower than a year earlier.

Margin Squeeze
Even as rates rise, Singapore banks are getting less premium for the loans they make
Source: Bloomberg; company filings

That happened even as benchmark rates rose much faster than deposit rates, the perfect environment to boost earnings.

Premium Mirage
Singapore's benchmark rate has risen by much more than what banks pay for deposits
Source: Bloomberg

On OCBC's earnings call, Chief Financial Officer Darren Tan offered an explanation for the phenomenon:

"Given the current economic environment, obviously, a lot of banks are competing for high quality net interest margins which is why -- the same space we're in -- which is why the credit spread, we do expect that to continue to tighten." 

In other words, all the banks want to lend to the best clients. Hence, premiums are actually dropping for those blessed borrowers.

It's no surprise the Monetary Authority of Singapore this week moved to relax takeover rules for finance companies in a bid to make more funding available for small and medium enterprises. 

Until Singapore banks get out of their bad oil trip, they won't feel in shape to take serious risks again. Those 250-basis-point net interest margins of a decade ago aren't coming back soon.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

(Updates fifth paragraph with UOB's net interest margin.)

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Christopher Langner in Singapore at

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Matthew Brooker at