Sept. 22 (Bloomberg) -- The Singapore government pared its stake in Citigroup Inc. to less than 5 percent, realizing a $1.6 billion profit as the city-state’s investment companies reduce holdings in European and U.S. banks.

Government of Singapore Investment Corp. sold the stock after converting preferred shares in the New York-based bank into a more than 9 percent common-equity stake, it said in a statement. The company, manager of more than $100 billion of foreign- exchange reserves, also 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’s Citigroup bet fared better than those of Temasek Holdings Pte, Singapore’s smaller investment company, which sold its stakes in Bank of America Corp. and Barclays Plc at a loss.

“There is clear evidence that the financial stimulus by central banks are bearing fruit,” said Singapore-based Roger Groebli, head of financial market analysis at LGT Capital Management, which oversees about $75 billion in assets.

Citigroup shares traded in Frankfurt gained 2.3 percent to 3.07 euros as of 12:08 p.m. local time.

GIC exchanged $6.88 billion of convertible preferred stock for Citigroup common shares at $3.25 apiece on Sept. 11, together with the U.S. government and other investors. GIC ended up with a stake of more than 9 percent in Citigroup following the exchange.

‘Too Early’

“This was the level GIC had intended when it invested in Citigroup through the convertible security,” GIC said. A “stake below 5 percent reflects GIC’s goals and desire to be a portfolio investor” after reducing its holding through open market sales, the company said.

GIC said it remains committed to its $18 billion of investments in Citigroup and UBS AG. New York-based Citigroup, the largest U.S. bank by assets, said in January 2008 it was getting $14.5 billion from investors including GIC.

The overall portfolio value of the foreign-exchange reserve manager fell about 25 percent between October 2007 and December 2008, Finance Minister Tharman Shanmugaratnam said in March. GIC bought stakes in UBS and Citigroup “too early,” the Straits Times reported on March 5, citing Minister Mentor Lee Kuan Yew.

GIC said last month it didn’t take part in the placement of 6 billion Swiss franc ($5.9 billion) of UBS shares sold by the Swiss government, adding that it maintains its “confidence in the long-term prospect” of the Zurich-based bank.

Temasek reported last week a 66 percent drop in profit in the 12 months to March 31 on losses from the sale of its stakes in Bank of America and Barclays, part of S$16 billion ($11.3 billion) of divestments last fiscal year.

To contact the reporter on this story: Netty Ismail in Singapore nismail3@bloomberg.net.

Last Updated: September 22, 2009 06:22 EDT