Goldman Sachs Group Inc., the biggest securities firm by revenue, said profit dropped 40 percent, beating analysts’ estimates, as lower costs and higher investment-banking revenue cushioned a decline in trading.

Third-quarter net income fell to $1.9 billion, or $2.98 per share, from $3.19 billion, or $5.25, a year earlier, the New York-based bank said today in a statement. The average estimate of 20 analysts surveyed by Bloomberg was $2.29 per share. Estimates ranged from $1.81 to $3.09.

Chief Executive Officer Lloyd Blankfein, who led the firm to record earnings last year, is navigating through a business slowdown and trying to burnish Goldman Sachs’s reputation after settling a fraud lawsuit from the Securities and Exchange Commission in July. The firm is also adapting to new U.S. financial rules and international capital requirements that some investors say could change its business model.

“There’s still a view amongst institutions that Goldman’s going to make their money, the question is just how much that power has been eroded away with financial regulation,” Alan Villalon, a senior research analyst at Minneapolis-based FAF Advisors Inc., said before the results were released. “Some of the riskier stuff is going to go away.”

Third-quarter compensation fell to $3.83 billion, helping cut total operating expenses 20 percent to $6.09 billion.

Compensation Costs

The firm, which set a Wall Street pay record in 2007, allocated $13.1 billion for compensation in the first nine months of the year, or enough to pay each of its 35,400 employees $370,706 for the period. The figure fell 21 percent from the $16.7 billion set aside for compensation in the first nine months of 2009.

Goldman Sachs rose to $154.33 in New York trading from $153.70 at the close yesterday. The stock has climbed 11 percent since July 14, the day before the firm announced it had reached a $550 million settlement with the SEC over fraud charges related to its 2007 sale of a mortgage-linked investment.

Bank of America Corp., the biggest U.S. bank by assets, reported a $7.3 billion loss earlier today that the company said was caused by new federal rules limiting fees on consumer accounts and credit cards. The Charlotte, North Carolina-based company said yesterday it would resume foreclosures after an Oct. 8 halt to review its procedures.

Dodd-Frank

The Dodd-Frank financial-regulation legislation signed into law by President Barack Obama in July limits banks’ ability to trade their own capital, known as proprietary trading, and requires portions of the derivatives market to be handled on exchanges. One of Goldman Sachs’s proprietary-trading units, known as principal strategies, is being shut down, people familiar with the situation said last month.

In the third quarter, revenue from trading fixed-income, currencies and commodities, known as FICC, fell to $3.77 billion, 14 percent lower than the $4.4 billion posted in the previous quarter and down 37 percent from $5.99 billion in the third quarter of 2009. Equities revenue climbed to $1.86 billion in the quarter from $1.21 billion in the second quarter and decreased from $2.78 billion in the year-earlier period.

JPMorgan Chase & Co. and Citigroup Inc., the second- and third-biggest U.S. banks by assets, respectively, reported declines in fixed-income sales and trading from the prior quarter and the year earlier while showing improvements in equity trading.

Principal Investments

Principal Investments, the Goldman Sachs unit that invests the firm’s own money in companies and real estate, recorded $754 million in gains compared with $943 million in the prior quarter and $1.26 billion a year earlier. At the end of the quarter Goldman Sachs sold a stake in Industrial & Commercial Bank of China Ltd., the world’s largest lender by market value, for HK$17.45 billion ($2.25 billion).

Goldman Sachs is the No. 1 ranked adviser on mergers and acquisitions this year, according to data compiled by Bloomberg. The firm’s advisory revenue increased to $496 million in the quarter from $472 million in the prior quarter and $325 million in the year-earlier period.

Revenue from debt underwriting rose to $335 million from $223 million in the prior quarter, while equity underwriting revenue gained to $288 million from $222 million in the second quarter.

Asset-management revenue climbed 5 percent to $1.02 billion from $976 million in the prior quarter as assets under management rose to $823 billion from $802 billion three months earlier. Revenue from securities services, which includes prime brokerage services for hedge funds, declined to $383 million from $397 million in the prior quarter.

Litton Unit

The firm’s Litton Loan Servicing LP unit, which processes mortgage-payments, said on Oct. 8 that it suspended some foreclosures as it completes a review of its procedures. Several banks froze foreclosures and all 50 states’ attorneys general began a joint investigation last week into how banks handle foreclosures amid evidence that some used faulty paperwork to try to seize homes. The news sparked concern that banks may be required to buy back more home loans from investors in mortgage- backed securities, adding to costs.

The Litton business, which Goldman Sachs acquired in 2008, isn’t likely to be as much of a concern for Goldman Sachs as the mortgage issue is for bigger home lenders such as Bank of America and Wells Fargo & Co., said Matt McCormick, a banking- industry analyst and portfolio manager at Cincinnati-based Bahl & Gaynor, which manages $2.9 billion and doesn’t own Goldman Sachs.