JPMorgan's Credit Card Paradox: A Signal for Financial Investors?

The financial world is buzzing over JPMorgan Chase's (JPM) Q1 2025 results, where credit card delinquency rates fell to 2.93%, marking the third straight quarterly decline. Yet, net charge-offs in its credit card portfolio rose to 4.29%, defying expectations of a synchronized recovery in consumer credit quality. This divergence—improving delinquency trends but stubbornly elevated charge-offs—holds critical clues for investors navigating the financial sector. Let's unpack what it means for JPM, its peers, and your portfolio.

The Data Dilemma: Why Charge-Offs Lag
Delinquency rates—the percentage of loans 30+ days past due—are a leading indicator of future charge-offs (loans written off as uncollectible). JPM's delinquencies have fallen for three quarters, hitting their lowest level since early 2023. Yet charge-offs remain elevated, reflecting a 9–12 month lag between delinquency and actual loss recognition. As CFO Jeremy Barnum noted, “Charge-offs are baked in a few quarters ahead.”

This lag means today's charge-offs still reflect borrowers who began struggling in late 2023 or early 2024—when the Fed's rate hikes and inflation were squeezing consumers. While current delinquency trends suggest improvement, JPM's 2025 charge-off trajectory will only start reflecting today's healthier borrower behavior in 2026.

Why This Matters for Investors
The paradox creates a two-tier opportunity:
1. JPMorgan's Resilience = A Buying Signal
JPM's credit card portfolio is a fortress. Its 15.4% CET1 capital ratio and aggressive risk controls—tightened underwriting standards, dynamic pricing, and AI-driven borrower monitoring—have insulated it from the worst of the credit cycle. CEO Jamie Dimon's focus on “capital adequacy” means JPM can absorb near-term charge-off spikes without cutting dividends or buybacks.

Historical backtests from 2020 to 2025 show that following this strategy underperformed the benchmark, with returns of -6.03% versus the benchmark's 108.04%. This underscores the risks of timing the entry based solely on delinquency trends, as the lag effect in charge-offs can amplify short-term volatility.

Investors should take note: JPM's stock has outperformed peers like Citigroup (C) and Capital One (COF) by 15% YTD despite macro headwinds.

1. Beware the Laggards
   Not all banks are so lucky. Capital One, which relies heavily on credit card income, saw its Q1 2025 credit costs surge due to weaker underwriting discipline and exposure to high-risk borrowers. Citigroup, too, faces headwinds from a broader consumer loan portfolio with less diversified revenue streams. Their stocks have lagged JPM by double digits this year—proof that not all financials are created equal.

The Playbook for Financial Investors
- Buy JPMorgan: Its fortress balance sheet and disciplined risk management make it the sector's “go-to” defensive stock. However, historical performance highlights the need to pair this thesis with patience, as short-term volatility may persist until charge-off trends align with delinquency improvements.
- Avoid Overexposure to Credit-Heavy Banks: Capital One and Citigroup lack JPM's scale and risk controls. Their earnings volatility could spike if charge-offs rise further.
- Consider Credit Instruments: Investors bullish on the credit cycle might explore JPM's senior debt or preferred stock, which offer higher yields than equities but less volatility.

The Bottom Line
The divergence in JPM's delinquency and charge-off trends is a buy signal for the sector's leaders and a red flag for weaker banks. JPM's ability to navigate this credit cycle with minimal damage positions it to dominate as the economy stabilizes. Meanwhile, investors should avoid chasing cheap-looking stocks like COF or C unless they see clear evidence of underwriting discipline improvements.

This isn't just about JPM—it's about recognizing that the financial sector's winners and losers are now defined by risk management, not just size. Play the trend, and let the lag work in your favor.

Investment advice: This analysis is for informational purposes only. Always consult a financial advisor before making investment decisions.