COVID-19 and its related containment measures in Argentina have modified operations in the local credit market. In the coming weeks and months, securitized portfolio performance will depend mainly on the progress of the lockdown measures adopted (preventive and mandatory), and on the evolution of the economic and financial situation in Argentina.

Branch Lockdowns Are The Main Factor In Origination Decline

In general, since most companies carry out personal and consumer loan originations through their own branches, we expect a sharp drop in those origination volumes due to those branches locking down as part of the COVID-19 containment measures in Argentina. For mutual associations and credit cooperatives, there will be a slightly smaller decline as they were included in the list of activities and services declared essential as of April 3, 2020.

In our opinion, it will be difficult to maintain the same levels of origination as before the pandemic since, due to social distancing, only part of the population goes out when it is extremely necessary. In addition, the companies that can open to the public do so with less staff to guarantee the health security of employees and customers. The speed at which credit institutions can adapt their commercial strategy to online operation is the key factor in determining how strong the drop in origination will be, assuming that mandatory social distancing continues.

For entities whose collection was mainly through direct debit from the debtor banking accounts (system CBU, as per acronym in Spanish), the negative effect will be double. In addition to the temporary closure of branches, to resume the origination of new credits, companies must rearrange their collection strategy in line with Communication "A" 6909 of Feb. 19, 2020, from the Central Bank of the Argentine Republic (BCRA, by its acronym in Spanish). The Communication prohibits the use of interbank direct debit and recurring immediate debit (DEBIN) for the collection of any concept linked to loans. Among the alternatives, the companies can migrate to a system of voluntary payments, they can establish private agreements with banks, or they can continue using the DEBIN spot mechanism that requires authorization by the client to apply each payment. We understand that, initially, the companies will work with a mix of these alternatives.

On the contrary, we expect an increase in the origination of regional credit cards, mainly due to consumption in supermarkets and pharmacies, as individuals increase their consumption of essential goods due to lockdown. However, this growth could be limited because debtors have already use the full credit available on their cards or due to the readjustment of the credit scoring by each company to reflect the more recent performance of the debtor.

Lastly, we do not expect changes in the mortgage loan origination since this segment was already down due to the high inflation during 2019 and was estimated to continue to be down for 2020, and due to the tighter origination policies from banks after the depreciation of Argentinean peso that exacerbated the fall in income in real terms.

Macroeconomic Environment And Buy-Here-Pay-Here Collection Practice Compromise Obligations Performance

For now, regarding performance, we do not expect a higher deterioration on payroll deductible loans of pensioners and public workers, as they will continue receiving their salaries or pensions normally. In the event that there is a reduction in the salaries of public employees in a particular sector, the existing limitation on the debt ceiling will result in no more than the available quota being debited, which could affect the delinquency levels of that sector.

For the CBU loans originated previously to the BCRA communication, they will see an increase in delinquency levels, even if they are not affected directly by the announced measures. The CBU system allows the debtor to make cash withdrawals from the bank account before the installment due date; and given the current conditions and the increase in demand for liquidity, we understand that debtors, whose income has been reduced by the macroeconomic context, will choose for to use this option, which could affect delinquency levels.

Regional credit cards--whose debtors, due to the business' idiosyncrasy, are used to paying their obligations in branches and/or collection agencies--have already shown a decrease in collection levels compared to the same day of previous months. However, during the week of April 13, when the BCRA provided the opening of branches for credit and consumer card companies and for other non-financial credit providers, the collection levels showed a strong increase, but they remain below the average.

This situation shows that debtors are willing to pay in order to continue using their credit cards. As of April 20, 2020, the central bank authorized the operation of service collection companies, including the opening of some branches that also provide this service. We estimate that by the end of April, the collection levels will continue increasing due to payments received in branches and agencies.

Personal and consumer loans with voluntary payments are the most affected by branch lockdowns. The BCRA measure that allows the opening of branches includes the companies that sell appliances, but only for the payment of credits. Consequently, since the customers cannot renew their loans or acquire other good, the incentive is much lower to pay a loan that has been fully disbursed.

For mortgages, we expect that delinquency ratios will remain stable due to the credit quality of the target obligor and the low loan-to-value (LTV) ratio that generates incentives for debtors to continue paying down their obligations.

Social Distancing And Lockdown Measures Will Set The Tone

Within the scenarios we analyzed, to the extent that some provinces partially relax the lockdown and certain activities are resumed, the origination and collection volumes could increase.

Despite attempts to use alternative collection channels, the importance of opening commercial premises was evident in recent days, as this made a difference in terms of collection. However, even if the lockdown is lifted, either totally or partially, collection levels would remain below average mainly due to the deterioration of the macroeconomic context. Also, if the government maintains social distancing measures, credit companies will probably operate with less employees in the collection areas.

On the other hand, if the government decides to apply the social distancing and lockdown measures in a more strict way, this could increase the deterioration of the securitized assets amid the economic conditions and due to the potential income reduction of medium and low-income debtors. For Argentina, we forecast a third consecutive year of an economic contraction in 2020, with GDP falling 7%. The government has been in default since year-end 2019, so access to international credit markets was already restricted before the pandemic. The structural economic weakness seen before the pandemic indicates this year's downturn will be deeper and the recovery will take longer than most other major economies in the region. We will continue monitoring the performance of rated financial trusts and of any factor that could affect them.

On April 2, 2020, S&P Global Ratings placed the following ratings on CreditWatch with negative implications. The CreditWatch status indicates our opinion about the potential direction of a short- or long-term rating; the negative implications indicates that we can lower the rating. The CreditWatch status reflects our perception of increased risk after the implementation of lockdown measures in Argentine as of March 20, 2020, to contain the spread of coronavirus.

Our assumptions

S&P Global Ratings acknowledges a high degree of uncertainty about the rate of spread and peak of the coronavirus outbreak. Some government authorities estimate the pandemic will peak about midyear, and we are using this assumption in assessing the economic and credit implications. We believe the measures adopted to contain COVID-19 have pushed the global economy into recession (see our macroeconomic and credit updates here: www.spglobal.com/ratings ). As the situation evolves, we will update our assumptions and estimates accordingly.