Goldman Sachs Group Inc quarterly earnings nearly quadrupled, topping expectations, but its shares fell on disappointment that so much of the profit came from trading gains that might not be sustainable.

The firm, which was already Wall Street's largest investment bank before the financial crisis and has become even more dominant as some rivals have fallen by the wayside, stayed on pace to hand out more than $20 billion in year-end bonuses. That would be equivalent to more than $630,000 per employee and could beat a record set for compensation in 2007.

But in a sign of weakness, Goldman's investment banking and asset management revenues were lower. The bank fell to No. 2, behind Morgan Stanley , in merger and acquisition adviser rankings for deals announced globally through the third quarter, according to Thomson Reuters. It also dropped a spot to No. 7 in global capital markets.

The New York-based firm posted third-quarter net income for common shareholders of $3.03 billion, or $5.25 a share, up from $845 million, or $1.81 per share, a year earlier.

It easily beat analysts' average forecast of $4.24 a share, according to Thomson Reuters I/B/E/S. But one analyst noted the beat was helped by Goldman's decision to set aside less than usual for compensation.

'HEIGHTENED EXPECTATIONS'

Goldman, which has been under fire from some quarters over gold-plated pay so soon after taking government bailout funds, allocated 43 percent of net revenue in the third quarter to compensation and benefits, compared with 49 percent in the first half.

Stellar results by rival JPMorgan Chase & Co on Wednesday may have prompted investors to raise the bar for Goldman.

JPMorgan's lift from fixed income in particular led analysts and investors to expect a similar or larger jump at Goldman, which has a reputation as a more aggressive risk-taker than the commercial bank. But Goldman's fixed income trading results slipped slightly from the second quarter.

Goldman shares fell 1.7 percent to $188.94 in morning trading, matching a decline in the Amex Securities Broker dealer index <.XBD>. The shares are up more than 124 percent this year.

Goldman produced great numbers but apparently didn't live up to those heightened expectations, said Peter Jankovskis, co-chief investment officer at Oakbrook Investments.

They're real earnings, the question is how repeatable are they, he said. Trading gains come and go. They're genuine earnings at the time, but its not like something you rely on quarter to quarter.

Goldman Sachs Chief Financial Officer Viniar said results lagged behind the second quarter's record earnings in part because of the summer downturn in the mergers and acquisitions business. He said on a conference call that the calendar for fourth-quarter equity underwriting appeared robust.

Viniar declined to compare Goldman's performance with that of JPMorgan, saying it was always hard to compare two companies quarter over quarter.

Citigroup Inc , which also reported results on Thursday, posted a per-share loss as it suffered $8 billion of credit losses.

COMPENSATION POOL

Goldman set aside $5.4 billion for compensation during the quarter, raising the total to $16.8 billion so far this year. The firm has drawn fire from politicians and the public for setting aside so much for bonuses so soon after repaying a $10 billion taxpayer bailout.

Goldman, which has been working on burnishing its image, said it made a $200 million contribution to the Goldman Sachs Foundation, an education charity. That helped raise its non-compensation expenses 2 percent to $2.23 billion.

Viniar, in the conference call, was bombarded by questions from reporters about the firm's plans for doling out bonuses. He said Goldman would not make a decision on the matter until the end of the year.

I would prefer people were focused on the performance of the business, he said.

STRONG TRADING REVENUE

Net revenue in Fixed Income, Currency and Commodities (FICC) was $5.99 billion in the third quarter, up from $1.59 billion a year earlier. The increase reflects strong performances in credit products and mortgages, which were significantly higher compared to a difficult third quarter of 2008.

Net revenue in equities was up 78 percent to $2.78 billion, helped by a strong performance in derivatives and shares.

Principal Investments posted net revenue of $1.26 billion after a $453 million loss in the year-ago quarter.

Net revenue in investment banking and financial advisory fell during the quarter, reflecting the decline in mergers and acquisitions.

Investment banking net revenue was $899 million, down 31 percent from the third quarter of 2008. Results in financial advisory were $325 million, down 47 percent.

Net revenue in Asset Management and Securities Services was down 29 percent to $1.45 billion.

Rival Morgan Stanley is expected to report quarterly results next Wednesday.

(Reporting by Steve Eder, Paritosh Bansal and Elinor Comlay; editing by John Wallace)

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