UPDATE 5-Goldman profit falls, but beats forecasts

(Adds detail on risk, tax savings)

By Joseph A. Giannone

NEW YORK, June 17 (Reuters) - Goldman Sachs Group Inc (GS.N) said on Tuesday quarterly earnings fell 11 percent as market turmoil hit trading and slowed investment banking, yet the firm again exceeded expectations by avoiding major losses on assets slammed by the credit crisis.

For more than a year, banks have been grappling with the challenges of a new world where profit engines such as mortgages, buyout finance and commercial real estate seized up. Goldman anticipated the changes earlier its rivals and was more aggressive in reducing exposure to hard-hit assets.

As a result, Goldman earnings fell for a second straight quarter, but not as much as its rivals.

"They have an uncanny ability to stay out of trouble," said Thomas Russo, portfolio manager at Gardner Russo & Gardner in Lancaster, Pennsylvania.

In the second quarter ended May 30, net income at the largest U.S. investment bank fell to $2.09 billion, or $4.58 a share, from $2.33 billion, or $4.93, a year earlier. The results beat the average analyst forecast of $3.42 by a third.

Net revenue fell 7 percent to $9.42 billion in a period that included the March panic that drove Bear Stearns into the ground and handed Lehman Brothers LEH.N a $2.8 billion loss.

Growth in equity underwriting, mergers and prime brokerage let Goldman beat forecasts, despite $775 million in write-downs and hedging losses. Goldman generated a surprisingly high 20 percent return on equity even as Merrill Lynch MER.N and Lehman executives forecast years of muted profit.

"They benefited from the disruption at the other investment banks," said Rose Grant, who helps manage $2 billion for Boston's Eastern Investment Advisors. "In tough times, people tend to gravitate toward the stronger financial firms."

Goldman shares, which had rallied 12 percent during the past week, were little changed in early afternoon trading.

TOUGH SLEDDING

Since credit and mortgage markets broke down last year, the world's banks and brokers have been forced to write down assets by more than $400 billion. The bursting of the credit bubble so far has led to 60,000 job losses and the ouster of senior executives at six of the world's largest banks.

The lack of easy credit also has slowed the pace of leveraged buyouts, mergers and public stock offerings. For stronger firms like Goldman, the environment led to new business helping companies raise capital and restructure.

Reflecting on the recent market environment, Goldman Chief Financial Officer David Viniar said markets remained treacherous. He estimated the credit crisis had probably moved past the halfway mark, yielding an environment that right now is "less stressed" than previous months.

"Clearly, the first weeks of March were the bottom, at least up to now," Viniar told reporters in a briefing. "Now there is less concern about systemic liquidity risk. People are focused on individual investments and credit."