Goldman Sachs Group Inc posted a 72 percent decline in quarterly earnings as trading revenue dropped, and the bank cautioned that its businesses face headwinds.

The results were stronger than many analysts had expected, but with Goldman discussing risks to future earnings, the bank's shares fell 1.4 percent to $151.61.

Goldman has long been viewed as an earnings machine, consistently posting some of the highest returns on Wall Street. Investors now wonder if U.S. financial reform will cut into trading revenue and force the bank to focus on investment banking businesses that have historically been less profitable, like stock underwriting and merger advisory.

There's a paradigm shift toward the core banking side as opposed to buying and selling junk to make money over the short term, said Jason Ware, analyst with fund manager Albion Financial Group.

I look at Goldman and I see an eroding brand, he added.

In January the bank posted a 53 percent decline in fourth-quarter profit and talked about how client trading volume in December was dead.

Trading volumes have risen since then. On Tuesday, Goldman said first-quarter customer trading revenue was 83 percent higher than the fourth quarter.

But Goldman's clients are still cautious, given the economic and regulatory environment, and the bank still sees the near-term outlook as uncertain, Chief Financial Officer David Viniar said.

We're taking advantage of opportunities where we see them with our clients but there aren't that many, Viniar said in response to a question about why the bank does not borrow more in order to boost its returns.

Trading profit across Wall Street has fallen from the unusually strong first quarter of 2010, but some banks have fared better than others. Goldman's fixed income, currency, and commodity trading revenue with clients fell 28 percent, while JPMorgan Chase & Co posted a drop of just 4 percent. JPMorgan's results include any trading that the bank may have done for its own account.

Viniar said Goldman's market share in trading with customers has fallen, and characterized current levels as more normalized.

Goldman still did trade and invest its own funds, and its revenue from those efforts rose 37 percent in the first quarter from a year earlier. With the Dodd-Frank financial reform law limiting the extent to which banks can trade for their own accounts, it is not clear how much longer that kind of revenue growth can persist.

Overall, Goldman's revenue fell 7 percent in the first quarter.

The bank posted a profit to common shareholders of $908 million, or $1.56 a share. Analysts' average forecast was 82 cents a share, according to Thomson Reuters I/B/E/S.

REGULATORY SCRUTINY

The bank bought back $5 billion of preferred shares from Warren Buffett's Berkshire Hathaway in the quarter, resulting in a one-time charge of $1.64 billion.

Excluding that charge, the bank would have earned $4.38 a share.

A year earlier, it posted earnings of $3.3 billion, or $5.59 a share.

Goldman set aside $5.23 billion for employee compensation in the quarter, a 5 percent decline from a year earlier.

The bank's return on average common shareholders' equity was 12.2 percent in the quarter, but excluding the preferred redemption it was 14.5 percent, annualized. By one rule of thumb, a 14.5 percent return on equity should correspond to shares trading at about 1.45 times their book value, or net accounting value.

With Goldman's shares trading at about 1.2 times their book value based on Monday's closing price, some investors see the stock as cheap.

Unfortunately, they've got an incredible amount of regulatory scrutiny on them right now and litigation risk. I think that's what holding back the stock, said Keith Davis of Farr, Miller & Washington, who holds Goldman shares.

Even if a 14.5 percent return on equity is sustainable, it is far below the levels in the years leading up to the financial crisis, when Goldman often posted returns on equity greater than 30 percent.

(Reporting by Lauren Tara LaCapra and Dan Wilchins; Additional reporting by Angela Moon; editing by John Wallace)

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