updated 9/12/2006 12:11:08 PM ET 2006-09-12T16:11:08

Goldman Sachs Group Inc., the nation’s third-largest securities firm, said its third-quarter profit fell less than expected as a robust investment banking performance helped offset a summer slump in trading.

The results released Tuesday, which were stronger than analysts projected, raised expectations that other Wall Street firms reporting in the coming days will also show the ability to navigate past worries of an economic slowdown. Rivals Morgan Stanley Inc., Lehman Brothers Holdings Inc., and Bear Stearns Cos. have seen not just a market slowdown, but also a dearth of merger and initial public offering deals.

For the quarter ended Aug. 25, Goldman reported a profit of $1.56 billion, or $3.26 per share, after preferred dividend payments, compared to $1.61 billion, or $3.25 per share, in the year-ago period. The firm had more shares outstanding a year earlier.

Lloyd Blankfein, in his first quarter since taking over as chairman and chief executive after Henry Paulson became Treasury Secretary in June, led Goldman to its third-highest quarterly revenue performance. Stronger investment banking and financial advisory fees helped power revenue to $7.46 billion from $7.29 billion last year.

Results, although lower than last year, surpassed Wall Street projections for a profit of $2.97 per share on $7.17 billion of revenue, according to analysts polled by Thomson Financial.

“This is particularly noteworthy given our record performance for the first half of the year,” Blankfein said in a statement. “While market conditions were more challenging this quarter, our results underscore the strength and depth of our client franchise.”

Projections for most Wall Street investment banks were lowered several times during the quarter as analysts expected a summer slowdown would sideswipe investment banking profits. Fees from IPOs and other transactions were seen sharply declining during a period in which stocks declined.

Board authorizes buyback program
Goldman also announced that its board authorized the repurchase of an additional 60 million shares, costing about $9.06 billion compared to Monday’s closing share price. This brings the total authorized stock buyback to 73.3 million shares.

Despite the dip in profit, investors cheered the firm’s ability to overcome difficult market conditions that surfaced after a record first half. Shares rose sharply in early trading, and are up some 22 percent this year.

“Our main reaction is relief that the company came through the difficult summer as well as it did and that backlogs have held up,” said Prudential Securities analyst Michael Mayo.

Investment banking returns were better than many on Wall Street had expected given fears a slowing economy might cause companies to delay or nix deals all together. Revenue for the business rose to $1.29 billion from $1.02 billion in the year-ago period.

Goldman, which is the top merger adviser of all its Wall Street rivals, attributed the gain to strong equity and debt underwriting. Fees derived from merger advisory increased 9 percent.

David Viniar, Goldman’s chief financial officer, said many of the firm’s corporate clients are optimistic about pursuing deals in the fourth quarter.

“The level of dialogue on transactions is still quite high, the corporate activity level is quite high, and people are interested in doing deals,” he said. “There’s a clear recognition that the U.S. economy has slowed from where it was earlier in the year, but it’s still growing nicely. ... The markets are showing more hesitancy than the general tone among companies.”

Fixed-income trading, which has proven to be Goldman’s biggest business, had revenue that climbed 4 percent to $2.74 billion. Trading of commodities and mortgages helped offset a decline in revenue from currencies, Viniar said.

Equity trading remains sluggish
Equity trading remained one of the few sluggish parts of Goldman’s overall results, where revenue declined 3 percent to $1.55 billion during the quarter. Major stock indexes began to weaken in late May, and only began to rebound last month.

Goldman’s own investments, which includes a stake in Japan’s Sumitomo Mitsui Financial Group Inc., fell $430 million from $843 million a year earlier. The bulk of this loss came from hedging its investment in Sumitomo, which still delivered a $261 million gain during the period.

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