A lower local currency could support domestic interest rates tied to lending, bolstering earnings, Chng Sok Hui, chief financial officer at Singapore’s biggest bank, said Wednesday in an e-mailed reply to questions.

The yuan recorded its biggest two-day slump in 21 years amid concerns of a further economic slowdown in Asia’s biggest economy, where Singapore banks including DBS have expanded business. Singapore’s dollar is tumbling at the fastest pace since 2001 as traders use it as a proxy for less-liquid currencies in Southeast Asia.

“Negative sentiments” regarding the impact of a China slowdown on Singaporean bank earnings are “overdone,” Kevin Kwek, an analyst at Sanford C. Bernstein in Singapore, wrote in a report Thursday. “Further weakness on the Singapore dollar should have been expected and poses offsetting implications.”

Singapore bank shares rebounded Thursday. DBS rose 1.9% at 9:38 a.m. Thursday local time after plunging 5.5% Wednesday, the most since October 2011. Closest rival Oversea-Chinese Banking Corp. gained 1.9% after slumping 5.8%. United Overseas Bank climbed 1.7%. The benchmark Straits Times Index rose 0.8%.

Singapore Rates
For DBS, the “positive translation effects” of appreciating US and Hong Kong dollars against Singapore’s currency “will more than outweigh the negative impact of a depreciating renminbi,” Chng said. “A weaker Singapore dollar could also be supportive of Sibor and swap-offer rates, which will be beneficial to earnings.”

Singapore currency’s fell to a five-year low of $1.4165 against the US dollar on Wednesday. The three-month Singapore interbank offered rate rose as much as 5.5 basis points, the biggest increase since Jan 5, to 0.9345%. Sibor has climbed this year, boosting net interest margins for the city’s banks in the first half.

The Singapore dollar rose 0.3% to $1.3952 at 9:25 a.m. local time Thursday after China’s yuan reference rate fell for a third day, widening the scope for declines in the currency after Tuesday’s devaluation.

Help Loans
Chng also said that the yuan’s depreciation “will have some small translation impact” on the bank’s earnings in China. At the same time, it “may lead to a pickup in China exports, and this could be helpful to loan growth,” she added.

DBS and its local peers are expanding in China. It took over Royal Bank of Scotland Group Plc’s retail and commercial banking customers in the country in a deal agreed in December 2010. The Singaporean lender now has more than 100 branches in Hong Kong, China and Taiwan.

Most of DBS’s revenue from Greater China comes from Hong Kong. Excluding the territory, the region made up 6% of DBS’s pretax profit in the first half.