Pandemic Profits Begin to Ebb at America’s Biggest Banks

Banks have enjoyed unparalleled growth during the pandemic, buoyed by a deal-making boom, market volatility that supercharged trading arms and a housing market that made mortgage lending more profitable than ever. At the same time, the doomsday scenarios that banks girded against in the pandemic’s early days never materialized, which freed up additional profits. Bad loans remain near record lows, and consumer and commercial customers alike have weathered the pandemic with, on average, plenty of cash on hand.

Now, some of the forces that pushed bank profits to new records are starting to weaken. JPMorgan said the shifting environment and higher costs would mean it wouldn’t hit its longer-term profitability targets in 2022 and maybe 2023.

“The headwinds likely exceed the tailwinds,” JPMorgan’s finance chief Jeremy Barnum told analysts. “We are in for a couple of years of sub-target returns.”

Trading revenue fell 11% at JPMorgan and 17% at Citigroup, dragged down by declines in fixed-income trading.

And banks are reaching the end of the cycle of unwinding loan-loss reserves, a major source of income gains earlier in 2021. Both JPMorgan and Citigroup have released the majority of funds they set aside in 2020.

JPMorgan logged a profit of $10.4 billion, or $3.33 per share. Citigroup posted $3.2 billion, or $1.46 per share. Both beat the expectations of analysts polled by FactSet.

Revenue for JPMorgan was roughly flat at $29.3 billion, missing expectations. Revenue rose 1% to $17 billion at Citigroup, beating expectations.

Still, for the full year, results were up sharply from the pandemic. JPMorgan blew away its prior record profit, posting $48.3 billion. Citigroup nearly doubled its net income to $22 billion.

Wells Fargo & Co., which also reported Friday, notched an 86% increase in fourth-quarter earnings. Its year-ago results were hurt by a restructuring charge and a charge tied to customer remediation for its fake-accounts scandal. Revenue rose 13%. The bank’s shares rose 3.7%.

The outlook for banks remains strong.

“With all respect to the fact that people are suffering in Covid and all that, the fact is, in spite of Omicron, in spite of supply chains, 2021 was one of the best growth years ever,” JPMorgan Chief Executive Jamie Dimon told analysts. “And 2022 looks like it will [be] actually pretty good.”

Demand for loans is on the rise, and anticipated increases in short-term interest rates should revive lending profits, one area where banks have struggled.

Outstanding loans increased from the previous quarter at all three banks. Business lending remained mixed, but consumers started carrying higher card balances at both JPMorgan and Wells Fargo. The affluent clients of JPMorgan’s wealth management division and Citigroup’s private bank increased their borrowing, tapping their portfolios for investing purposes.

JPMorgan’s net interest margin, a measure of what the bank makes on loans minus what it pays on deposits, ticked up from the third quarter, the first increase since the pandemic began. The same measure rose at Wells Fargo over the same period.

Deal making continued at a red-hot pace, showing chief executives remain confident. Fees from advising companies on mergers and acquisitions rose 86% at JPMorgan and more than doubled at Citigroup.

Bankers cautioned that the Omicron variant, which emerged around Thanksgiving, remains a concern. It has hampered factories that make goods and the trucks and ships that transport them. Fresh data released Friday showed that U.S. retail sales flagged in December, and manufacturing output fell.

Citigroup and JPMorgan said consumer spending, which had been increasing, softened in late December, including in categories tied closely to social-distancing concerns such as restaurants and hospitality.

“We certainly hope Omicron is the final disruptive phase of this pandemic, but there are also quite a few other issues to navigate,” Citigroup CEO Jane Fraser said, citing inflation and tensions with Russia.

The Labor Department said this week that U.S. inflation hit its fastest pace in nearly four decades, which means Americans are being forced to absorb higher prices for gasoline, cars, furniture and food.

Fed officials signaled last week that they could raise rates as soon as March, earlier than previously expected, and banks are keeping a close eye on any developments that could change those calculations. Higher rates allow banks to charge more on loans, which increases their lending profits. And since banks are already awash in deposits, they can afford to be stingy about raising the rates they pay.

Expenses rose sharply at JPMorgan and Citigroup and are expected to keep going up, banks said, particularly as competition and wage pressures force them to increase compensation up and down their ranks.

Wells Fargo said it would increase its minimum wage to between $18 and $22 an hour. The change will be effective by the end of the month, Chief Executive Charlie Scharf said on a call with analysts.

JPMorgan spent $71 billion in 2021 and forecast it would spend $77 billion in 2022, citing technology, marketing, compensation and, in general, plans that Mr. Barnum called “critical for securing the future of the company.” The forecast surprised analysts.

Write to David Benoit at david.benoit@wsj.com and Orla McCaffrey at orla.mccaffrey@wsj.com