GIC sticks to UBS, Citigroup investments on long-term prospects

September 30, 2009
Singapore Democrats

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Andrea Tan
Bloomberg

Government of Singapore Investment Corp. said it is confident about the long-term prospects of UBS AG and Citigroup Inc. as the banks overcome challenges returning to profit.

The manager of more than $100 billion of the city’s foreign reserves is still losing money on its holding in UBS, Switzerland’s biggest bank by assets, and has made a profit on its investment in Citigroup, GIC said in its annual report today.

GIC and Temasek Holdings Pte, Singapore’s other state fund, bought stakes in U.S. and European banks as the collapse in the U.S. subprime mortgage market in 2007 froze credit markets and led to more than $1.6 trillion in losses and writedowns at financial institutions worldwide. GIC last week cut its stake in New York-based Citigroup to less than 5 percent from more than 9 percent, realizing a $1.6 billion gain on the investment.

“What GIC has said, that their investments are on the way to recovery, means that we’re on better footing right now, not for big growth, but to put us on a stable ground and give us something that we can look forward to,” said Christopher Wong, a Singapore-based fund manager at Aberdeen Asset Management, which oversees $35 billion of assets including Standard Chartered Plc shares.

GIC said last month it didn’t take part in the placement of 6 billion Swiss francs ($5.8 billion) of Zurich-based UBS shares sold by the Swiss government.

Investment timing

The investments in UBS and Citigroup have improved “significantly,” though UBS will take longer to recover, GIC said in the annual report.

“We invested in the two banks in early 2008 during the initial stages of the financial crisis, and built in some downside protection,” said Chief Investment Officer Ng Kok Song, 61, in the annual report. “The escalation of the crisis beyond the U.S. sub-prime mortgage sector to a full-blown credit crunch inflicted considerable credit losses on both banks, which eventually required financial support from their respective governments.”

New York-based Citigroup, forced by the financial crisis to take a $45 billion government bailout and unload some of his biggest units, posted a $4.28 billion profit in the second quarter, compared with a loss of $2.5 billion a year earlier.

UBS reported a net loss of 1.4 billion Swiss francs in the second quarter, wider than the 395 million-franc deficit in the year-earlier period. The bank will take “some time” before returning to profitability, Chief Executive Officer Oswald Gruebel said in a text prepared for a speech during a conference in Zurich on Sept. 25.

Annual returns

GIC sold the Citigroup stake after converting preferred shares in the bank into a more than 9 percent common-equity stake, it said Sept. 22. It has a $1.6 billion paper profit on its remaining holding. Citigroup shares have surged more than fourfold since falling below $1 on March 5, as the U.S. economy began to show signs of emerging from its deepest postwar recession.

GIC, established in 1981, bought stakes in the two banks “too early,” the Straits Times reported on March 5, citing the fund’s Chairman Lee Kuan Yew, 86, Singapore’s Minister Mentor and former prime minister.

The sovereign fund said annual returns in the past 20 years averaged 5.7 percent in U.S. dollar terms, from 7.8 percent reported in the previous fiscal year.

Temasek

The global financial crisis hurt the portfolio of Temasek, which reported a record 66 percent drop in profit in the 12 months to March 31. The state fund sold its stakes in Bank of America Corp. and Barclays Plc at a loss as part of S$16 billion of divestments last fiscal year.

In the first quarter this year, Temasek sold its 3.8 percent stake in Bank of America, which it received after the bank bought Merrill Lynch & Co., at a loss that may have totaled $4.6 billion. It also sold its 2 percent stake in London-based Barclays. The company didn’t detail the size of those losses in its annual report earlier this month.

The subprime meltdown wiped 44 percent off the MSCI World Index, erasing about $24 trillion from the value of global equities in the 12 months to the end of March. The MSCI World Index has rallied 64 percent from this year’s low in March.

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