Goldman Sachs (GS) reported net income applicable to common shareholders of $2.2 billion, or $3.79 per diluted share, on $8.6 billion of net revenue for the fourth quarter of 2010. Net revenue was flat sequentially, down 3%, but revenue composition was different from what we--and probably others--had expected. We don't anticipate any significant changes in our $180 fair value estimate for Goldman's shares.
Fixed income, currency, and commodities, or FICC, was the fourth quarter's glaring area of weakness. FICC revenue came in at $1.6 billion, a 39% decline from the previous third quarter. The fourth-quarter weakness in FICC was partially made up by general strength in the company's investment banking, investing lending, and investment management segments. However, the FICC revenue line trajectory is important, as it has comprised 40% to 70% of net revenue over the last two years.
In terms of earnings, expenses must also be considered. The fourth quarter had a $135 million expense benefit from an overaccrual of UK bonus taxes, a $305 million impairment charge for the company's New York Stock Exchange Designated Market Maker rights, and a $320 million charitable contribution expense. The company's largest expense--compensation--came in at only 26% of net revenue.
Earnings in 2011 will be determined by the degree by which FICC makes a comeback, the support of other revenue lines, and the extent to which the company's compensation ratio is ratcheted up. The 39% FICC sequential decline was already on top of a 20% decline in FICC revenue from the second to the third quarter, and a 44% decline from the first to the second quarter, according to the company's recently revised reporting. Such declines notwithstanding, we think the overall setting is ripe for a turnaround. Economic and regulatory uncertainties rattled investor confidence during the fourth quarter, taking their toll on Goldman's FICC trading revenue. General seasonal slowness was also a contributing factor, in our view. We think these pressures will eventually pass, so we anticipate a rebound in FICC trading. We believe that the 2010 third quarter's FICC revenue looked like a fairly normalised level for the company, historically, even though it was 45% lower than the company's frothy second-quarter of 2009 peak FICC revenue.
Investment banking lines such as underwriting and financial advisory should do well, as more corporate heads assume renewed confidence in the economic recovery. That said, there's a slight point of caution in the near term: Goldman Sachs stated that its investment banking backlog decreased from the third to the fourth quarter. Increases in the company's investing lending and investment management segments will hinge on the staying power of the financial markets' rally.
Goldman Sachs' full-year compensation-to-net revenue ratio was 39%. Historically, the company's compensation ratio has ranged from 44% to 49%, with the notable exception of 2009, when the company was under intense media and government scrutiny. Barring any industrywide reset of compensation ratios, we believe that Goldman Sachs will eventually have to increase its employee compensation back to historical levels.
