Dec. 12 (Bloomberg) -- Goldman Sachs Group Inc. capped the most profitable year ever for a Wall Street firm, almost doubling fourth-quarter earnings on trading, underwriting and investments in Asia.

Net income advanced 93 percent to $3.15 billion, or $6.59 a share, in the three months ended Nov. 24 from $1.63 billion, or $3.35, a year earlier, the New York-based company said today in a statement. The average estimate of 14 analysts surveyed by Bloomberg was $6.17 a share.

The results mark the third consecutive year of record earnings for Goldman, the world's biggest securities firm by market value. While trading remained the dominant source of profit, Chief Executive Officer Lloyd Blankfein, who took over from Henry Paulson in June, also reaped gains from bigger investments in leveraged buyouts and paid out a smaller percentage of revenue in compensation.

``The company continues to execute and conditions in the marketplace are ideal for Goldman Sachs,'' said David Killian, who helps manage about $800 million at Stoneridge Investment Partners in Malvern, Pennsylvania. While his firm doesn't plan to sell any of the Goldman shares it already holds, Killian isn't buying more. ``The stock reflects a lot of the positive momentum that the company has right now,'' he said.

Goldman shares fell $2.52, or 1.2 percent, to $200 at 4:01 p.m. in New York Stock Exchange composite trading. The stock has climbed 57 percent this year, the most among U.S. securities firms and the largest annual advance since Goldman went public in 1999.

Broad Advance

Full-year net income of $9.54 billion exceeded fiscal 2005's total by 70 percent. Net revenue for all of 2006 rose 49 percent to $37.7 billion, outpacing a 36 percent rise in operating expenses. Lehman Brothers Holdings Inc. and Bear Stearns Cos. are scheduled to report financial results Dec. 14.

Fourth-quarter revenue advanced 47 percent to $9.41 billion from $6.4 billion a year earlier, while operating expenses grew 13 percent to $4.4 billion.

Return on equity, a measure of how effectively Goldman reinvests earnings, rose to 41.5 percent in the fourth quarter from 25.2 percent a year earlier. Full-year return on equity jumped to 32.8 percent from 21.8 percent.

Principal investments, which include gains in the value of stakes that Goldman bought in companies such as Industrial & Commercial Bank of China Ltd., rose 64 percent to $1.4 billion. Goldman's stake in Beijing-based ICBC, China's biggest lender, contributed $949 million of the principal investments revenue.

Gains in Japan

Japan's Accordia Golf Co., another Goldman investment, produced a gain of about $500 million, Chief Financial Officer David Viniar said on a conference call. That revenue was included in the firm's fixed income, currency and commodities unit because Accordia was one of the unit's investments in so- called distressed assets, Viniar said.

Some analysts, including Brad Hintz at Sanford Bernstein & Co. in New York, have predicted 2007 profit will decline. Viniar said that analysts failed to forecast that net income would climb 70 percent in 2006.

``Last year at this time, the consensus had our earnings up 1.2 percent for 2006 versus 2005,'' Viniar said. ``We outperformed that by a bit. It's very hard to predict what's going to happen in our business.''

Fourth-quarter trading revenue rose 55 percent to $5.24 billion, accounting for more than half of the firm's income. Revenue from fixed-income, currencies and commodities trading rose 58 percent to $3.1 billion, including the Accordia gain. Equities trading revenue jumped 52 percent to $2.13 billion.

Housing Slowdown

Within fixed income, Goldman's largest division, Viniar said mortgage-related revenue declined from the third quarter and may slump next year amid a slowdown in the U.S. housing market. The drop has been most evident is so-called sub-prime mortgages, or loans made to the least credit-worthy borrowers, he said. Goldman so far hasn't seen any impact on other parts of the debt market, he said.

Revenue at Goldman's fund-management division rose 19 percent to $933 million in the quarter from a year earlier, as a 33 percent increase in fees for overseeing assets outstripped a 78 percent drop in incentive fees, which are tied to the funds' performance.

Outlook for 2007

Viniar said weaker returns at some Goldman hedge funds, such as the flagship $10 billion Global Alpha fund, were responsible for the decline in incentive fees during the quarter compared with a year earlier. The effect will be felt in the first quarter of 2007, when the firm books most of its incentive fees, he said.

``You should expect a significant decline in incentive fees in the first quarter, and over the course of the year, you should expect a significant increase in asset-management fees'' because of a rise in funds under management, Viniar said during an interview.

Goldman set aside $16.5 billion to pay compensation and benefits for its 26,467 full-time employees for the year. That sum -- equal to all the firm's revenue in 2000 -- works out to an average $622,000 per employee.

The firm's ratio of compensation and benefits to revenue fell to 43.7 percent for 2006 from 46.6 percent in fiscal 2005.

The drop in the compensation ratio is ``a direct result of our financial performance this year, not necessarily a permanent shift to a lower comp ratio,'' Viniar said.

Revenue from investment banking rose 42 percent to $1.34 billion. Fees for advising on takeovers climbed 15 percent to $627 million, while underwriting revenue advanced 78 percent to $717 million. Viniar said the current backlog of investment banking assignments is the highest since 2000.

Leading Adviser

Goldman, the No. 1 adviser on mergers in the past five years, worked on $145 billion of deals completed during the fiscal fourth quarter, compared with $176 billion a year earlier, according to data compiled by Bloomberg. The firm's biggest completed deal this quarter was Mittal Steel Co.'s $38.3 billion takeover of Arcelor SA.

The firm managed $15.8 billion in equity offerings in the quarter, up from $9.3 billion a year earlier, Bloomberg data show, and sales of high-yield or ``junk'' bonds swelled to $3.8 billion from $2.2 billion a year earlier. The largest stock offering arranged by Goldman was the A$15.5 billion ($12.2 billion) sale of shares in Telstra Corp., Australia's biggest phone company.

To contact the reporter on this story: Christine Harper in New York at charper@bloomberg.net.

Last Updated: December 12, 2006 16:39 EST