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Credicorp Ltd (NYSE:BAP)
Q3 2020 Earnings Call
Nov 6, 2020, 9:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, everyone. I would like to welcome all of you to Credicorp Limited's Third Quarter 2020 Conference Call. We now have all of our speakers in conference. [Operator Instructions] At the conclusion of today's presentation, we will open the floor for questions. At that time instructions will be given as to the procedure to follow if you would like to ask a question. With us today is Mr. Walter Bayly, Chief Executive Officer; Mr. Gianfranco Ferrari, Deputy Chief Executive Officer; Mr. Reynaldo Llosa, Chief Risk Officer; Mr. Cesar Rios, Chief Financial Officer.

Now, it is now my pleasure to turn the conference over to Creditcorp's Chief Financial Officer, Mr. Cesar Rios. Mr. Rios, you may begin.

Cesar Rios -- Chief Financial Officer

Thank you. Good morning and welcome to Credicorp's conference call on our earnings results for the third quarter of 2020. Since our previous conference call, the sanity situation in Peru has improved considerably, and the economy continues to rapidly recorder. In fact, the evolution of growth scenario has exceeded expectations. Far better on weekly death tolls has registered significant improvement in recent months. Nevertheless, we remain vigilant to track an eventual second wave of COVID-19. In parallel, the Peruvian economy experienced V shaped recovery throughout the third quarter of 2020. The economics have been encouraging over the past few months. According to the latest official data, economic activity model was only 10% below the figure reported for the same time last year. This compares favorably with minus 40% register for the year on year comparison in April. This V shaped recovery has also been observed over several economic indicators. As you can see in the chart, real estate transactions, cement dispatches and vehicle sales has recovered significantly in recent months. Reactivation is also evident in labor market data, including payrolls through BCP. Next slide, please. Although, Peru GDP recorded its steepest decline in the second quarter of 2020. It is rapidly regaining territory in LatAM. Moreover, market consensus has gradually improved its expectations for Peru GDP growth in 2021. Peru is expected to lead economic recovery in LatAm toward 2021, as we leverage a strong macroeconomic fundamental, high commodity prices and broad government stimulus packages. In our previous conference call, we expect the GDP to drop between 11% and 15% in 2020, and that the rebound in 2021 will see trade between 6% and 10%. Our latest estimates suggest that GDP will contract around 12.5% in 2020 and will rebound between 9% and 12% in 2021. It is important to note that the series of elections, referendums and constitutional changes are under way in the countries in which Credicorp operates. In Bolivia, Luis Arce from Evo Morales party, who won the general election and will take office on November 8. In Chile, 78% of the population voted in favor of writing a new constitution.

Next slide please. The positive trends seen for economic data is mirrored in the evolution of data for the financial system. Transactions with debit cards and BCP have exceeded pre-COVID-19 levels. Nonetheless, credit card transactions are recovering, but at a slower pace. During the third quarter Reactiva Peru program continue to contribute to lone growth system wide. According to data from the central bank, loan growth stood at 14.1% year-over-year at a constant exchange rate, supported by the effect of Reactiva loans. If we exclude the Reactiva loans effect, total loans declined 2% year-over-year. It is important to remember that Reactiva loans started businesses of different sizes. After the first phase of Reactiva program was rolled out for S/30 billion, a second tranche option with an additional S/25.3 billion. Disbursements of this second phase were primary for the small micro and medium sized businesses. We would like to mention several economic policy measures and regulatory actions that are in effect or under discussion. First, there has been further debate on additional economic stimulus. According to this last monthly policies statement, the Central Bank stands ready to expand the liquidity injections to a range of instruments. Second, Congress is currently discussing initiatives in several key areas. A proposal has been made by a special commission that contemplates a complete overhaul of the Peruvian pension fund system. If this bill becomes law, this could have a material impact in Peru. Given the scope and complexity of the measures, the commission has requested additional time for analysis. Third, earlier this week, a motion was approved to impeach the president. The President is expected to present his legal defense on Monday, November 9. First, a number of deals on pension fund withdrawals has been played since the first quarter. On November 2nd, another bill was passed giving pensioners the right to make withdrawals again their funds. Two, a second program of monetary transfers began in October.

These instruments which are known as universal bonds constitute direct monetary transfer for the government to mitigate the impact of the pandemic. The government recently approved a payroll subsidy program, which from the private sector fulfill the specific requirements can access this facility. The program aims to bolster a recovering former unemployed. Lastly, the government has rolled out a COVID-19 guarantee program, which is directed at individuals under this initiative. The bank can also reduce interest rates in exchange for additional government loan coverage for very specific segments of clients. We will continue to closely monitor developments on the economic policy and regulatory reforms to evaluate the impact of credit cards operations. Next slide, please. At the core, we also see clear signs of reactivation, the reprogramed for portfolio classes to realize there has been an uptick in demand for financial roles in the individual segments. Additionally, the pandemic has accelerated flying migration to digital channels, which are handling a large portion of the upswing in transactions. Over the past few months, we have worked to support our clients as they adjust to the new dynamics. We have actively offered different programming facilities to our clients to bolster the recovery. Today, recurrent portfolio accounts for 17.1% of recourse total loans and 11% of recourse total loans corresponding to the retail recruitment portfolio. In the new COVID-19 guarantee program targets mainly a subset of this portfolio to be eligible. Loans are subject to term on loan amount caps and the facilities available solely to clients that have received no other government facilities. With this limitation, we do not expect the impact to be highly significant, but we'll continue to monitor our client needs to respond quickly to changes. September marked a turning point in loan origination and sales of insurance for retail and microfinance loans in October. There trends as in trade. Our client's adoption of digital Chinese, which was discussed during the Investor Day presentation in our transformation strategy, continues to gain considerable traction. All of these help, credit score advancing its goal to foster a more inclusive economy.

Next slide, please. Going on to our third quarter financial highlights results shows that the worst is behind us. And credit score is on the road to recovery. It is important to note that there were several non-recurring events this quarter. A summary of the results chose in a quarter over a year analysis, the loan portfolio on deposit base grew more than 21% and 27% in quarter in balance introspective driven mainly by loans from the government relief programs. After isolating the fate of these programs create a corporate structure a loan portfolio so in quarter in balance. Net interest income resume growth and increased 10.2% quarter-over-quarter recovering from the zero interest rate long impact and analysis of the year-over-year evolution of adjusted interest income shows that adjusted interest income decrease 8.3% driven by lower interest rates and a contraction in structural loan partially offset by active investment portfolio management. While adjusted interest expenses 19.3% due to funding structure optimization. In this context, adjusted net interest income contracted 4.3% I mean situated up 4.05%. Fede income increased 54% quarter-over-quarter in line with Economic Regulation, an increase in transactional activity and this duration of fee waivers. Insurance and the writer results were negative, driven mainly by an increase in claims for mortality related to COVID-19 in the life business, which was partially offset by lower claims in the property and casualty patients. The costs of risk improved this quarter and situated at 3.84% forward looking provisional expenses flow compared to the previous quarter. This reflects an upward revision in the macroeconomic outlook and the fact that the probability of default has falling in more segments driven by improvements in client behavior. This quarter was marked by several non-recurring charges we will explain throughout the presentation for a total of PEN185 million after taxes. In this context, Credico reported PEN105 million in 18 books, which represented a return over equity of 1.8%. If we isolate non-recurring charges, adjusted net income this quarter was PEN289 million solid and adjusted ROE 4.9%. I will now explain the results of our main operating unit.

Next slide please. I will start by explaining BCP Stand-alone quarterly results. On a quarter-over-quarter basis, loan growth was driven mainly by the second tranche of the reactive approach, plans to this phase where this goes primary in the SME business and SME-Pyme segments. In this scenario, the total loan portfolio for SME segments rule 34% while the total loan portfolio BCP grow 4.5%, the real truth BCPs charter portfolio constructed 4.9%, this quarter mainly driven by wholesale banking where clients repay liquidity facilities. These bolstered are the beginning of the crisis, also the quarterly evolution of this structure loan portfolio daily balances contract it. It is important to know that loan origination in retail banking is gaining traction and is expected to reach pre-pandemic levels by year end. The total loan and restructure loan portfolio posted 21.4% and 1.9% growth, respectively in average daily balance this year-over-year. BCP funding structure has improved to active management. In the third quarter of 2020, total deposits grew 7% quarter-over-quarter, mainly driven by non-interest bearing deposits and savings deposits, which increased 11% and 8%, respectively. In the year-over-year evolution, total deposits grew 30%. Year-over-year growth in the policies was less by non-interest bearing demand deposits and saving deposits, which is funded 66% and 38%, respectively. In this context, BCP has been able to repay all the resources funding, such as due to banks repos and senior bonds, which mature this quarter. Additionally, BCP executed a liability management transaction this quarter, subordinated bonds maturing in 2026 and 2027, rates of 6.875% at 6.125%, respectively, for an $850 million subordinated bond, a 3.125% that matures in 2030 and is called a 2025. Next slide please. Now, I will comment on the evolution of payments behavior in retail banking at BCP and discuss the reprogram portfolio. In the third quarter, retail clients and BCP reduce an improvement in the payment behavior, hand-in-hand with economic reactivation. On time payments and restructure retail loans reach 94% on the end of September, improving from 72% in June an analysis of payments, performance shows that on time payments only structural retained loans do are different by sub-segments.

In the case of SMEs, the payment ratio for businesses that benefited from practical loans was created by 94% basis 88% for non-beneficiaries. In the case of individuals, the payment ratio is higher for BCP, who registered an on-time payment rate of 97% compared to 91% of non-payable tracks. By the end of September 71% of the structural retail portfolio reported net current reprogramming proceeded. During the same month, BCPs reprogrammed retail portfolios created a 23%, which is far below this figure of 58%, which is the first wave of passing. Our analysis of the retail portfolio maturity profile the deals that high uncertainty portfolio is comprised of clients that are still within the grace period and have received at least one credit facility, although that have overview installed currently, 18% of BCP structured retail portfolio falls within this category. As loans come due during the fourth quarter of this year, we will have more information to assess the performance and risk of these loans. Next slide please. The improvement in macroeconomic expectations and client behavior indicators lead provision expenses to drop this quarter. Nonetheless, asset quality began to deteriorate as grace periods expire and some clients were unable to service their best. BCPs prohibition expenses decreased quarter-over-quarter due to improvement in expectations for GDP grow for 2021 and 2022 and fine tuning of reasonableness and updating of client information to create a better picture of clients situations. Provision expenses for the individual segment register the highest decrease after significant provisioning in the second quarter of this year. This quarter, provisional expenses were mainly concentrated in SME-Pyme segments in the retail portfolio after delinquency levels rose among clients that benefited from more than one facility. Finally, wholesale banking probation expenses increased to cover a small number of clients in the energy and airline sectors. In this scenario, the structural cost of risk situated at 3.22% for the quarter and 5.33% year-to-date. Deterioration in structural loans where mainly concentrated in the consumer credit card and SME payment segment. Grace periods in the individual SME segment will expire or not rush in October and December respectively.

As such, we expect overdue loans to increase in the individual's portfolio next quarter particularly in the credit card and consumer segments. Wide overview loans in this SME payment are expected to rise in the first quarter of 2021. Credit course provision level and asset quality this quarter led to NPL coverage ratio to hit a record high of 157%. Finally, BCP's accumulated provisions represent 7.8% of the total structural portfolio. Next slide please. Going on to BCP results, net interest income initiated recovered and grew 10.2% quarter-over-quarter recovering from zero interest rate loan incur, an analysis of the adjusted net interest income evolution year-over-year results, growth adjusted interest income decreased 8.2% due to a drop in market rate, which was partially offset by active investment portfolio management. And second, adjusted expenses fell 27% due to a drop in interest rates and funding optimization. In this context adjusted net interest income fall 2.5% year-over-year. In contrast, NIM and restructure NIM decreased due to several factors. First BCPs restructuring mean decrease 23 basis points quarter-over-quarter, the negative impact of lower interest rate was partially offset by active investment portfolio management, which increased transformation while maintaining short term liquidity positions and the optimization of the permanent structure. Second, the loan was marked by a significant increase of Reactiva loan and a slight construction in a structure a lot. And third, the decrease of 19 basis points in NIM, due to non-procuring expenses related to liability management transaction conducted in July. Risk adjusted NIM situated at 1.6% this quarter in terms of non-financial income core items increased 38% for third quarter hand in hand with economic reactivation. A 50% quarter-over-quarter growth posted in theme was driven by an upswing in transactions and are active, reactivation of fee waivers last quarter, in line with our clients report plan, we expect this outward trend to continue in coming months rolled in non-core items were driven mainly by expansion in net gains from security. Next slide, please. Lastly, the efficiency race the BCP improved quarter-over-quarter, several short term cost control measures has been applied, including reducing non-essential expenses and variable compensation.

After adjusting operating income for the non-recurring charges register in the second and third quarter this year, the adjusting efficiency ratio improves from 39.9% to 38.9% quarter-over-quarter as a split into our investors a BCPs transformation strategy is advancing and we maintain our aspiration of becoming the most efficient bank in Latin America in both online, BCP generated $421 million profit contribution this quarter. Next slide, please. With regard to microfinance, let me explain the dynamics of Mibanco loan portfolio and deposit base this quarter. Loan growth of Mibanco was attributable to government release progress, namely Reactiva the second phase of Reactiva is qualifying requirements for micro and small business and attach more of the Mibanco clients can tap deposits by the end of September Mibanco has this more than 2.3 billion solid year-to-date under the Reactiva and FAE program. The aforementioned levels loans to grow 15.1% year-over-year measure in average daily balance. If we exclude government loans, the structural portfolio Mibanco fell 3.4% year-over-year. In September, loan origination in Mibanco structure portfolio began to recover bolster by new campaigns to support clients that are still within our waist appetite. Regarding Mibanco funding structure, demand and saving deposits grew 26% quarter-over-quarter and 37% year over year this evolution coupled with an increasing funding from the Central Bank to finance disbursement of government loans to lay the funding costs to fall 56 basis points quarter-over-quarter and 98 basis points year-over-year. Next slide please. Client payments at Mibanco are trending upwards and the high uncertainty portfolio has been zero diminish. This quarter, Mibanco show an increasing on time payments and a drop in the facilities needed by these clients. By the end of September, the breakdown of our structured portfolio was as follows. 61% of loans were reprogrammed and up-to-date, 85% were non-recurring up-to-date loans and four points compared to the last quarter. And finally 4% were overdue loans. As mentioned previously, the high uncertainty portfolio is comprised of clients that are still within the grace period and have received at least one credit facility of those that half have reviewed. These portfolio has evolved positive with Mibanco some time payments in grace.

Next slide please. The COVID-19 environment continuously impacts Mibanco provision expected. Growth in provisions was attributable traditional the probability of default rate after charging risk assessments were updated. This was partially offset by an improvement in the macroeconomic estimates for power forward looking model, expansion in provision expenses cope with a contraction in a structural loan portfolio let the structural concentrate to situate a 6.1% on annualized pace. In terms of portfolio quality, this structural NPL ratio rose to 9.3% in the third quarter, this was mainly attributable to an increase in refinancing for some clients that so February 29, calculated 15 days overdue and delinquency among clients that did not use financial relief facilities. In this context, Mibanco NPL coverage ratio increased and situated are 206.5%. Finally, Mibanco accumulated provisions represented 19% of the total restructure portfolio this quarter. Next slide, please. Now, let's look at Mibanco's performance. Net interest income and these were negatively impacted by the long mix but low margin government loans rather than his troubled loans drove growth. This negative effect was initiated by accrued interest reversals after grace periods expired and some clients reduce the delinquency and a decreasing interest rate. If we look at the effect the government programs Mibanco's charter is being situated at 12%. This quarter, non-financial income began to recover driven by an uptick in bancassurance policies and fees. Operating expenses decreased 7.3% year-over-year, which was attributable to cost saving progress. Nonetheless, income decrease at faster phase leading to a deterioration in efficiency going forward. Additional initiatives to improve efficiency include optimization, optimizing the network, centralizing processes, and improving the productivity of relationship managers through technology. In the bottom line, Mibanco generated a loss this quarter, which was mainly due to the contraction in nature interesting got an increase in provision expenses. Next slide, please. Now, I will comment on the results of the insurance businesses.

This quarter Grupo Pacifico income was negative due to higher net claims in IBNR, insured but not reported provisions in the licensed business, especially for the credit life and disability and survivorship problems, which were heavily impacted by the increasing mortality due to COVID 10. The property and casualty business was to improve year-over-year due to a decrease in net claims mainly in the car business due to mobility restrictions during the pandemic. In the quarter-over-quarter analysis net premiums in the property and casualty business register recovery due to new sales and renewals mainly in the car and medical assistance business. In the health insurance business improve year-over-year, driven by a drop in net claims after the demand for out of passion services served during the pandemic. The health providers business registered a decrease in the demand for services due to frequency limits of clinics and the fact that clients prefer to delay appointment in the COVID-19 context. Pacifico's Regulatory capital coverage ratio increase from 1.3% at December 2019 to 1.33%. Sorry, 1.33 as of September 2020, which was attributable to the earnings capitalization. Next slide please. Regarding the pension fund business assets under management remained relatively stable quarter-over-quarter fund withdrawals and their government mandated facilities were gradually offset by the combined effect of an increasing monthly contributions and growth in fund profitability. It is important to know that the bill passed on November 2, which allows additional withdrawals will impact assets under management for an estimated 3 billion. Net income decreased quarter-over-quarter due to a decline in the profitability of the reserve fund in line with a decreasing market profitability and non-recurring expenses related to fee and withdrawal facilities. This was partially offset by an increase in fees -- fee essentially were lifted this quarter. In the year over year analysis total fees decrease given that a significant number of individuals in the affiliate base lost their jobs during the pandemic. Finally, a congressional commission is deliberating comprehensive pension system reform. It is very difficult to predict how this will impact in our business.

Next slide please. Regarding our investment banking of wealth management business, total assets under management posted an increase of 7.8% quarter over quarter which was fully bridged the gap produced by COVID-19 impact in assets their management in the first quarter of this year. Regarding profit contribution, recurring income grew 13% quarter over quarter. This increase was mainly driven by a recovery in our corporate finance business in line with economic reactivation and the country's progress within the pipeline where security in the third quarter including from last boundary changes. Regarding non recurring results, there were two charges this quarter. First, there was a mark to market reduce to inappropriate investment at ASP. This late one realized losses of $33 million this quarter. There's a significant unrealized gains passport. Second, there was a non recurring provision expense for a legal contingency at ASP for the modification which offset the year today unrealized gains on the formation of proprietary investments. Next slide please. Now, I will summarize the cokes consolidated performance. Records loan portfolio grew 19.6% year over year in other stated balances and 21.3% in quarter and balances bolstered by loans and their government programs. If we isolate the effects of government program loans this transfer loan portfolio grew 1.8% year over year on average daily balance system fell 0.3% in quarter environment and analysis of the balance sheet structure shows that critical interest earning assets increased 28.5% year over year driven by both the loan portfolio and the investment portfolio. In the investment portfolio, we have optimized excess liquidity returns while managing interest rate with and maintaining a solid short term liquidity buffer critical also optimizes funding structure by optimizing the deposit mix paying off other funding sources and executing a liability management strategy to optimize the maturity profile and reduce the cost of VCP subordinated bonds. Consequently, credit courses structured funding costs 40 basis points here today to 2%.Regarding non interest bearing assets, there was an adjustment to incorporate this goodwill this quarter for $64 million.

It is important to know that we have acquired this business prior to the crisis and massage the Gordon estimate value has varied from our initial projections. Nonetheless, we still see significant potential value down the road, which can be leveraged to credit risk management and an improvement in efficiency or productivity. Next slide please. Now to summarize the evolution of the main indicators, in line with improving in payments and economic regulation, provision expenses dropped quarter over quarter after hitting a peak in the second quarter. We expect this downward trend to contain, asset quality deteriorated as grace periods expire and sometimes remain unable to serve as a test. Nonetheless, our coverage ratio increase year over year situated at 169.9%.Net interest income increased 10.2% quarter over quarter. The analysis of adjusted net interest income on year over year basis indicates that the adjusted interest income decrease 8.3%, while adjusted interest expenses paid 19.3%. Consequently, adjusted net interest income contracted 4.3%. Of course net interest margin this quarter situated of 4.05% was negatively impacted by a decrease in the structure in the government programs is structurally alarming. And finally non recurring charges related to bonds exchange transaction structuring was situated 4.46% for the quarter and 4.93% year to date. Finally increase adjusted on a structural risk adjusted mean situated at 1.6% and 1.87% respectively. Next slide please. Non financial income expanded 8.6% quarter over quarter driven mainly by 54% increase in fee income due to significant role in transactional activity in BCP. Additionally, effect transactions grew 3.8% quarter report, in these core items was partially offset by a contraction in genetic gang securities related to mark to market production in a capital investment for approximately 23% million solace in the trading portfolio on a USB and an impairment charge of 23 million solace after a downward adjustment was made to the value of a private equity investment. In terms of efficiency, the cost to income ratio situated 45.9% year to date adjusting for non-recurring events, the adjusted efficiency ratio, traded a 44.5% year to date. The year over year deterioration of 160 basis points was mainly driven by micro finance.

And about half of these drugs was attributable from last year. The short term cost control measures has included using not essential expenses, variable compensation and the footprint of face to face charter. Teams are challenging the limits of our operating model to optimize the physical distribution network, support functions, organization, and IT architecture. Next slide please. I think profitability levels for the cost adjusted and adjusted ROE accretive at PEN737 million and 12% for this quarter. This quarter non-recurring charges were reported for a total of PEN185 million after taxes. If we exclude nonrecurring charges, our adjusted net income for this quarter was PEN289 million. While the adjusted strong was traded a 4.9%. from an equity Q1 level for both BCP and Mibanco remain above our internal task situated at 11.5 and 16.5 respectively. As mentioned in our last conference call our curative Q1 ratio are calculated and this Peruvian gabba counting and attach use net income figures in the past it was not necessary to discuss this issue because LOCA and IFRS making configures will always been very similar, but even that temporary differences aren't relevant in the current environment. We want to draw your attention to these points. Now let's look at our outlook. Next slide, please. In this environment, we can often a clear picture of the median term. We expect the rule GDP to grow between 9% and 12%. In terms of loan origination our commercial activity is accelerated by December of this year, we expect to return to pre pandemic levels in the univer segments and see 75%, 85% of pre pandemic levels in this SME and micro-financing segment. Regarding mean they may not be seen, but of the government progress or need to level off why you're struggling with benefits from a decrease in the funding costs and asset management of the investment portfolio. This property and cash-flow should continue to increase, but will be partially offset by life claims. Probation expenses are expected to continue to follow a downward trend next quarter and 2021, we will continue to control expenses in 2020 and our fine tune in BCPS operating models to determining a structural measures for the medium term in micro finance may and shorts are on the way to optimize the branch, know what and improve the productivity of the sales force. Finally, we expect our ROE to return to the high teens by the second semester of 2022.

With these comments, I would like to open the Q&A please.

Questions and Answers:

Operator

[Operator Instructions] Thank you. Our first question will come from Ernesto Gargando, Bank of America.

Ernesto Gargando -- Bank of America -- Analyst

Hi, good morning, Walter, Franco, Caesar, Reynaldo and good morning, everyone. Thanks for the presentation. And thanks for you. My first question is on probation charges. So we saw that they started to normalize to PEN1.3 billion in the quarter. So these 11, we should continue to see during the last quarter? And then my second question is on your reprogram portfolio, as you mentioned in your presentation, the retail banking portfolio 6% are loans while, well, for saying stealing in the grace period. I also noticed that you are presenting the same breakdown for individuals and SME business. So by any chances you have the number of the reprogram portfolio at that consolidated basis, indicating how much is overdue and how much will be resuming payments in the next month? Considering the overdue loans in each segment and the portfolio that will reach on payments, do you think that the preventive provisions created you in the first half of the year will be enough to cover that portfolio? We just want to know if you have already created enough provisions, if you have achieved provisions or is there seem OK. And then my final question is on insurance revenues were affected by higher claims in life insurance due to the COVID-19. So I would like to see your expectations for the insurance revenues in the next quarter. Thank you.

Walter Bayly -- Chief Executive Officer

Thank you, Ernesto. Regarding the questions on provisions, as we stated we've seen quite an improvement in the levels of provisions during this third quarter as compared to second quarter. We expected to have a number closer to what we did in the first quarter. And the first difference both in the macro environment as well as the performance of our clients will make us feel quite positive toward the level of provisions for the next quarter. We will have a precise number today. But we see that positive trend continue in the same directions. In terms of the reprogram portfolio, this is a long journey. And we've seen -- and we've been helping our clients to reprogram their loans and at a gradual space we've seen our clients both in SME and individual clients has started to pay their loans at a better level than we expected initially. So in terms of -- if we've done enough provisions, I mean we are in the right trend toward provisioning what we need to do, and that positive trend is expected to continue as I mentioned during the next word, and especially during 2021.

Operator

Thank you very much. Our next question will come from Jorge Kuri, Morgan Stanley.

Jorge Kuri -- Morgan Stanley -- Analyst

Hi. Good morning, everyone. Two questions, please. The first one is on your operating expenses. Your outlook slide says that the operating model is being challenged to conduct structural medium-term measures. What exactly does that mean, in terms of expense growth for 2021 and 2022? Your expense growth had been over the last two years of around 6% to 7%. This year you may end up with around, I'm guessing 7% to 8%. Does that mean that we're not going to see a slowdown in that level of growth for 2021 or 2022? And especially given the context of the very weak revenue growth, do you think that there's maybe an opportunity for you to try to offset that through being more aggressive in causing expenses particularly next year.

Walter Bayly -- Chief Executive Officer

When we aim is to have income growing at a faster pace and expenses and this is structural measures that we have mentioned are going to have a gradual impact in 2021 and more visible in 2022. Short-term and continuous improvement measure has been taken in the last year at the same time that we spend more heavily in transformation. But these additional more structural measures are going to take some time to mature.

Jorge Kuri -- Morgan Stanley -- Analyst

So, just to nail it down in terms of expense growth, does this mean that your expenses will grow similar to the last two years 7%, 8%, or more than that?

Walter Bayly -- Chief Executive Officer

We expect to be in this range probably a little bit slower, in line with the increased level of activity in the transactional activity and be offering a new and different product. While I tried to manage more than the line by itself is the ratio between income and expense growth.

Jorge Kuri -- Morgan Stanley -- Analyst

Got it. Thank you. My second question is on provisions. So you build a very sensible, I think, amount of excess provisions given the NPL outlook and overall contraction in economic activity. At this point, do you think it's possible to return to 1.5%, 1.6% cost of risk for the second half of 2021. I'm assuming you're still going to be with probably elevated cost of risk in the first half of the year given that you're going to start to see the wave of NPLs from forbearance programs rolling off. But again, given the significant amount of reserves that you build, can we see that sort of like toward the second half of next year?

Walter Bayly -- Chief Executive Officer

We are going to converge to, let's say, more normal level of provisions at the end of next year. But we also should consider that we gradually are changing the composition of the portfolio more retail one. So even with the same line-by-line, business-by-business, a level of provisions, the mix are going to conduct was slightly higher a structural cost of risk due to the relative weight of the business.

Jorge Kuri -- Morgan Stanley -- Analyst

And so we understand what you're saying. So that say, in 2018 and 2019 your cost of risk was 1.5%, 1.6%, given the mix composition shift, what would be the equivalent cost of risk?

Cesar Rios -- Chief Financial Officer

I would say a little bit more than that at the end of a year -- the next year. It's going to be a gradual recovery -- the non-dimensional, it's not an on/off effect, you have a significant impact in the second quarter of this year and after that a gradual improvement.

Jorge Kuri -- Morgan Stanley -- Analyst

So you think your cost of risk, say 2022, which you know, hopefully not one word, it's a normal year is around 2%. Is that kind of like the way I'm reading through the lines?

Cesar Rios -- Chief Financial Officer

And they need a probably little bit lower, yes.

Jorge Kuri -- Morgan Stanley -- Analyst

Sorry, I didn't hear. Sorry what?

Cesar Rios -- Chief Financial Officer

[Indecipherable] No, I was mentioning that this figure is probably in the upper 2022.

Jorge Kuri -- Morgan Stanley -- Analyst

All right, thank you.

Operator

Thank you very much. Our next question comes from Thiago Battista, UBS.

Thiago Battista -- UBS -- Analyst

Yeah, hi guys. Thanks for the opportunity. I have one question on the margins. You had mentioned in the guidance that the government loans pressure, your margins. So my question is do you believe that when those programs? The clients will be able to pay the same stress that used to be before those programs, so will the threat return to the normal level when all those programs are ended? And the second questions, seven questions about the Vivanco. When do you believe the banco should achieve the breakeven? And also, if you have any guess, on when the possibility Vivanco should return to the high teens level?

Walter Bayly -- Chief Executive Officer

First regarding to the first question, I think when the government product started to mature the second part of next year you are going to have a broad range of clients buy into a goes through the process and they are starting to have normalized conditions. A client that even with the support has become insolvent or unable to continue in business. And probably a third category, the clients are going to need additional support probably in the form of own longer term facilities. And I think that they both the clients in in all the categories have understood that these are special conditions. And when these facilities mature, they need to pay market play conditions based on their performance size on credit risk. That's our belief. This is a very special condition with government coverage with a special funding. I don't know if this helps for the first question?

Thiago Battista -- UBS -- Analyst

No, very clear.

Walter Bayly -- Chief Executive Officer

And for the second question, Vivanco is this is starting to recover. Also, as we mentioned, the difference is that the government programs and the reprogramming is started a little bit a later after DCP. In fact, the government programs a favor the banco Vivanco clients, mainly in the second wave in different ways. There were very few claims who cool apply to that. So the recovery is going to happen. But honestly the day after a case of DCP, and next year, we are going to have a much more positive year of course, but the delay is going to take the recoveries is slightly delayed in the case of Vivanco for the reasons I already mentioned.

Thiago Battista -- UBS -- Analyst

Perfect.

Operator

Thank you very much. Our next question will come from Tito Labarta, Goldman Sachs.

Jason Mollin -- Scotiabank -- Analyst

Hi, thank you. Good morning, everyone. First question following up on your margin, I would have expected a bigger increase in your margin. Just remember last quarter, you had some he froze installments that had about a 70 basis points, in fact, if I remember correctly, but your margin didn't really recover that much this quarter. Now is that mostly because more Activa loans or just to understand the dynamics there? Maybe another way to think about it, if you exclude Activa, what would your margin have been without the Activa alone?

Cesar Rios -- Chief Financial Officer

Actually, I think the margins are paying out as we expected and we as we provide guidance. I will differentiate two different things one is the NIM and another thing is the net interest margin as a figure as a number. In terms of mean they figure is significantly diluted by the huge amount of data that has almost zero margins or very low margins and was designed in such a such a because was a relief program. This is one part of the equation, but thinking in the net interest margin, it has been impacted and is recovering and the dynamics were explained you have a sudden shock of lower a reference rate more than 200 basis points are a significant part of secure that has severe impact in your short-term facilities. And you have also some smaller portfolio in the case of -- a slightly smaller in the case of BCP and that is a smaller portfolio in the case of Mibanco. So you have these impacts in the amount of margins. When we start to originate at a faster pace, a process that has already begun, we are starting to record volumes with higher margins and the mean is going to expand. The other impact that was a positive this quarter was the reduction in interest expenses. And the state of this reduction is going to be carried out the next quarters because a significant part of the process has already been done. But throughout the semester, I don't know the results.

Tito Labarta -- Goldman Sachs -- Analyst

Yeah no it's very helpful. Cesar thank you. Then maybe leading into my second question to get back to the high-teens ROE that you expect by 2022? What's going to be the main driver of that? Is your margin normalizing how dependent will that be on higher interest rates under the given loans coming off your books? Indeed, I know, there's a lot of moving parts. There's also provisions normalizing the cost cutting just to get a sense of what will it take to know what do you think to get to that high-teens ROE by 2022?

Cesar Rios -- Chief Financial Officer

Yeah. But I would like to emphasize that is in the second half of 2022, not for the whole 2022 that's relevant is precision. And they are going to these I will say the markets are going to be recovering in line with the factors we have been discussing, the provisions are going to be much more normalized and more in line with the new portfolio composition. And we are starting to gain efficiencies. Due to the execution of several initiatives, it should be noted that the general profitability is impacted in BCP, Mibanco on all parts of the world for the lower interest rate, this impact is compensated by a number of measures, but it makes a difference in our books. And our assumption is that the interest rates are going to be lower in 2022, locally and internationally. So we expect to regain levels of profitability. But with an underlying less profitable basic margins in several business due to lower reference rates.

Tito Labarta -- Goldman Sachs -- Analyst

Great. Thanks. That's helpful. So just to clarify that last point, you can get back to the high-teen ROE with interest rates, where they are today. Is that correct? Or do you need interest rates to increase?

Cesar Rios -- Chief Financial Officer

I think we can go with a lower interest rate, but apply in these three kinds of levels that I just mentioned, in the portfolio composition, higher efficiencies.

Tito Labarta -- Goldman Sachs -- Analyst

Perfect. All right. Thank you, Cesar.

Operator

Thank you very much. Our next question will come from Jason Mollin with Scotiabank.

Jason Mollin -- Scotiabank -- Analyst

Hi, everyone thanks for the opportunity. You've addressed my questions on margins, provisions costs. But maybe I can ask a general question on the outlook and the risks to that outlook of nine to 12% real GDP growth and everything that follows on there. I mean, you do see the reactivation. We've all seen it. It's been pretty impressive, but from very low levels. What could you see in this recovery is a second wave of COVID and locked down what are the risks of this outlook? I guess if you could help frame that. And how is the group preparing for this kind of scenario? Thank you, a negative scenario.

Cesar Rios -- Chief Financial Officer

Okay. I think one significant risk and I think not only for a critical but globally is a second wave not only in terms of infections, but mortality. That will lead to some kind of shutdowns with severe service severe impact in the business activity in economic activity in general. This is one reason. We are returning one encouraging sign but we take very prudently is that already the level of infections in Peru are very high different studies conducted using different statistical methods suggests that the level of infection interval can be as high as 50%. So even if we have unethical ways, probably the impact in total infections and mortality should be attenuated. But this is a significant race. And the older a potential risk is the changes in regulation we have elections next year. So far is not absolutely clear what who is going to be the winner we need probably much more time to have a clearer picture. We don't expect significant changes, but the risks are really there. The best a protection for our business is to have a very strong balance sheet solely capitalized business prudently management and efficiencies that allows us to operate even in less favorable environments. We are working this in this direction.

Jason Mollin -- Scotiabank -- Analyst

That's helpful. Thank you very much.

Operator

Mr. Alvaro, your line is live. If you had any comments.

Alvaro Correa -- Deputy Chief Executive Officer and Head of Insurance and Pension Funds

Okay, Thank you. Yes, there was a question related with the way your social insurance. And analytics important to know that has been one of the countries with the highest infection or contagious rates race for the world. And that site has a two sides. On the side, the high number of this, you have no direct impact in our life portfolio, we have an important life portfolio in Peru and includes a individualize mortgage protection insurance, great life insurance, in children, for a great cause is mobile business owners, and across all the social economic segments. But on the other side, with that high contagious rate, is we expect to be reaching a normal or regular rate in a few months. During for example, during July and August, we had the highest levels of this in our concrete a more than 2.5 times against the other. And during October, the number of exits of this a was similar and inclusive, lower than the number we had the March the first month of the pandemic in Peru. So we expect these trends continues in the same direction. And for the net loss, we don't see a small reductions in the life loss rate. And the P&C business, the situation has been the opposite. The lower economic activity and important part of our clients working at a time, please, degrees, decrease frequency and reduce the loss ratio.

Operator

Thank you very much. Our next question will come from Geoffrey Elliott, Autonomous.

Geoffrey Elliott -- Autonomous -- Analyst

Hello. Thanks very much for the call and for taking the question. Can you help us a little bit more on net interest income? When is that still expected to start inflecting? And moving up on a recurring basis? Is that is that going to happen soon? Or do we have to wait a little bit longer?

Cesar Rios -- Chief Financial Officer

Sorry, I couldn't hear the first part of the question very cleary.

Geoffrey Elliott -- Autonomous -- Analyst

The net interest income when is that expected to star increasing again on a recurring basis once you've taken out the one-off?

Cesar Rios -- Chief Financial Officer

Actually, if the process has begun, in line what Alvaro already explain. What's happening is that is starting to gain traction, but at a slower base due to the risk of a position in reference rates.

Geoffrey Elliott -- Autonomous -- Analyst

So just to be clear, so even though originations are going to be lower than they were pre-COVID you still think that the 4Q recurring NII can be higher than the 3Q recurring NII?

Cesar Rios -- Chief Financial Officer

Yes, because you start with a lower base of the case, at the level of origination that we are increasing a structural portfolio in GCP and Mibanco. So this is starting from a lower base. I repeat this point we are starting to build up property portfolio at this moment.

Geoffrey Elliott -- Autonomous -- Analyst

That's great. Thanks very much.

Operator

Thank you. Our next question will come from Brian Flores from Citi.

Brian Flores -- Citi -- Analyst

Hi. Thank you for the opportunity. They wanted to know, how are you thinking about structural NPLs going forward? Particularly, as you said, the second half of 2022. Thank you.

Cesar Rios -- Chief Financial Officer

Well, we'll probably see in the following quarters and increasing the NPL levels, because actual earnings would not appear in all segments, especially in the semi annual finance. But on the other side, we'll see an increase in the level of write-offs. Remember, during the first half of the year, U.S. regulatory constraints, we didn't make the adequate levels of write-offs. So I mean, on the net effect, because of the number of clients that were impacted will see a shift to higher NPLs. But in general, it will be an adequate level of compared to what we are expecting today.

Brian Flores -- Citi -- Analyst

Thank you. And just a quick follow in particular segment of your portfolio concerning you based on the results serving right now?

Cesar Rios -- Chief Financial Officer

There are no surprises in this quarter. We don't expect further surprises in following quarters. I mean, we see trends on both the SME and credit card segments of our portfolio, but not important shifts what we've seen to us as of today.

Brian Flores -- Citi -- Analyst

Thank you very much.

Operator

Thank you. Our next question will come from Carlos Gomez Lopez, HSBC.

Carlos Gomez Lopez -- HSBC -- Analyst

Hello and good morning. You could comment about the legislative initiatives that could impose either lower fees or caps on interest rates at the Peruvian banks. We know that a proposal was approved at the committee level. We are extending. What do you think the chances are and the potential impact on your numbers? In a small follow up, you have an additional person for matters in ASB. Is that a One-Off or are there any outstanding contingencies that we might see in the future? Thank you.

Gianfranco Ferrari -- Deputy Chief Executive Officer and Head of Universal Banking

Regarding -- this is Gianfranco Ferrari, good morning, everyone. Regarding your first question, there are some as you said some initiatives at the commission level in the Congress, it's too soon to tell if there is any of these initiatives may go into discussions with the Congress and if so, if they're approved and if so, how to calculate an impact. Our vision is that what Peru needs is the financial system and Peru is more financial inclusion. And any of these initiatives will generate financial exclusion, which is exactly the opposite impact. But as I mentioned before, it's too soon to tell if any of these initiatives will become a law and if so what the impact would be.

Carlos Gomez Lopez -- HSBC -- Analyst

Thank you.

Walter Bayly -- Chief Executive Officer

Hi. This is a Walter. Regarding -- we have made a provision for a recent ruling by the Supreme Court that was not necessary in our favor. So we decided to make this provision and we think that this is the end of it.

Carlos Gomez Lopez -- HSBC -- Analyst

Thank you so much.

Operator

Thank you. Our next question will come from Piedad Alessandri, Credicorp Capital.

Piedad Alessandri -- Credicorp Capital -- Analyst

Hi, thank you very much for allowing question. I wanted to know regarding corporate analysis, if you could give us a bit more detail on those cases from the energy and the airline sector. And if you see any segments behaving riskier?

Walter Bayly -- Chief Executive Officer

And as you probably know, we don't get into specific details in terms of specific cases or clients in the corporate world. Having said that, we can confirm you that we have established all the necessary provisions to cover all these losses in those two cases. And we don't expect any new big cases in the future in the near term.

Piedad Alessandri -- Credicorp Capital -- Analyst

Okay. Thank you very much.

Operator

Thank you. Our next question will come from Andre Soto, Santander.

Andre Soto -- Santander -- Analyst

Good morning. Thank you for taking my question. My question is related to the deal that was approved one month ago regarding reprograming and guarantees for for retail loans, including SMEs. I understand that you guys already mentioned you don't expect a material impact from that, but that I understand that when you refer impact, you mean the balance it will be a negative one, considering that it reduces your net interest income versus the reduction that you will get via the guarantee in your cost of risk. So I would like to confirm that that's the case, that you are expecting that on the balance that there would be a negative one, even if it's a small one. And in the end, this will depend on what is the level of adoption or involvement that you guys take in your product portfolio. So I'm also curious, what is the level of the -- rate of adoption that you asking to expect that this is going to be marginal impact? Thank you.

Cesar Rios -- Chief Financial Officer

We expect to have, as we mentioned, previously how more that is impacted, its difficult to say exactly what because it depends on the level of adoption and the specific type of trends that are going to access to the facility. But we like to emphasize that you are going to capture the costs and benefits in different lines, probably in different moments in time. What do I mean? If you are going to have an immediate reduction in margins and you are going to have deferred benefit in cost of risk? I don't know if this helps.

Andre Soto -- Santander -- Analyst

Yes, got it. My question was broadly speaking was, you know, this is voluntary on the back-side, but obviously there is a lot of pressure on the banks in general to provide facilities to the client. So I'm just curious of any percent that you can give us in terms of involvement of clients in this new program?

Cesar Rios -- Chief Financial Officer

Yes. I think we are going to do something that is sensible for us, but good for our clients. Something is an additional facility that some clients are going to benefit from an imbalance -- in the net effect is going to be moderate.

Walter Bayly -- Chief Executive Officer

Just to complement what Cesar just mentioned because of the amount of what was assigned, we don't see -- so this has two-fold answer. Because of the amount that was assigned, we don't see that this is going to be a massive program was assigned by the government, I mean, on one hand. On the other hand, we've basically restructure all of our portfolio -- all of our clients that needed a restructuring facility. So we don't see a large demand on our clients. Having said that, we do -- we're going to work proactively in helping the clients that needed and again we are trying to -- to balance that with demand to other relatively smaller financial institutions that haven't -- have not been as proactive as BCP in restructuring the client loans before.

Andre Soto -- Santander -- Analyst

That's it. I will jump line. Thank you so much

Operator

Thank you. Our next question will come from Yuri Fernandes, JPMorgan.

Yuri Fernandes -- JPMorgan -- Analyst

Thank you, Walter, Cesar. Good morning, everybody. I think [Indecipherable] asking questions. I have two. The first one is a follow-up in the margin. I understood the message that we should kind of stabilize or even the pivot a little bit from the current levels. But I had some doubts here regarding; first the over loans to paid -- as said right like the non-accrual loans probably pay for the increase this -- in the next quarter and for 2021 -- in the first two scores [Phonetic] 2021. And you also do government programs that I understood, and maybe they cannot be super vocal in the program because again, you have a lot of renegotiations already. The size of the guarantees is not that big. But it's too that should a headwind for margins, right. So I'm just would like to confirm that yes, margin should move is likely up from the different levels. And that's where taking consideration those to know is more moving parts, the non-accrual loans and also the renegotiated program. And my second question is regarding allowances. I understand charge-off are not there, right. Charge-off need accelerate, but it's you -- you are in Latin America, the bank with the biggest delta in allowance, right. Allowances almost double versus 2019. On your balance sheet, you have, I don't know 4.6 billion, 4.7 billion solid in higher allowances than you had last year. And so far, the data in reprogramnations [Phonetic] like new release seems to be second, OK, right. You have the 94% collection DTT, 84% collection you bank renegotiated loans are coming down from the peak. So the point is, could discuss in 2021 revisions of those provisions. Not only, you know like a lower cost of risk structurally, but I don't know the bank kind of is written those provision at some point. Thank you.

Cesar Rios -- Chief Financial Officer

Yes. I take the first one regarding margins. Of course, in our calculation, we are considering the non-accrual of delinquent loans. This is going to negatively impact the margins, but it's part of the assumptions that we have when we provided this guidance. The process is going to be to be gradual, because what's happening in accounting terms is that you accrue and when you have the actual default, you reverse the accrual and this diminish the income. So this is going to happen gradually at us are happening in the last quarter. I think is part of the question. I don't know if you have another complementary question regarding NIM. Sorry

Yuri Fernandes -- JPMorgan -- Analyst

No, no. That makes I was just trying to confirm because I understood the mix shift. But I was not sure about, you know, the non-accrual loans. But thank you for your question, yes, it's clear.

Cesar Rios -- Chief Financial Officer

Yes, and in terms of the levels of provisions or allowances for bad loans that -- have been mentioning throughout the call, I mean, the news have been positive and the trends have been better than we expected -- when we initially expected. Having said that there's a till DTT and what we call 18%, high uncertainty portfolio. We try clients that haven't still started paying their debts to pay yet. I mean, they are in grace period, and number is around 43%. So I mean, that your question in regarding that is there is an opportunity for revision provisions, will depend on the performance of these high uncertainty portfolios in both situations.

Yuri Fernandes -- JPMorgan -- Analyst

Okay, perfect. Thank you. Thank you very much.

Cesar Rios -- Chief Financial Officer

Only two to add some -- sorry -- to contribute to the answer of number, well, in the case of BCP in September, we have seen portfolio of around PEN42 billion, out of them PEN34 billion already has the obligation to make a payment during the month for that reason, we talk about an uncertain portfolios, because not every client has obligation to pay due to the reprogramming process.

Operator

Thank you. Our next question will come from Sergey Dubin, Harding Loevner.

Sergey Dubin -- Harding Loevner -- Analyst

Yes, good morning, gentlemen. Thanks for the call. Two questions fFrom my side. The first one, just a clarification, you mentioned something about capital ratios calculated according to standards versus capital ratios calculated into press, I guess or some other standards. So can you clarify exactly what the differences are? And what's the impact on these ratios? What are you showing in the presentation in -- on slide 30, are those calculated according to the rules in IFRS, what is it? What's the difference? What's the impact? That's the first question. Thanks.

Walter Bayly -- Chief Executive Officer

Okay. So, OK. The difference is that in normal times the difference between include losses forward-looking process provisions is very small, and so we don't make any difference. To give you an idea, in the case of BCP, at the end of September, the difference between a local and international accounting in terms of provision is PEN1.2. billion out of PEN7.7 billion. So, in local accounting, you have lower provisions and you have a higher a profit. And this impacts the level of capital. I can't be probably an accurate but the difference can be around 50, 60 basis points. In the case of Mibanco, the relative difference is a slightly higher, the difference is PEN500 million out of PEN1.8 billion in provisions. So you have more than 300 basis points in difference when you consider local and international accounting. Did I clarify the question or if you have another question. I'm happy to provide it.

Sergey Dubin -- Harding Loevner -- Analyst

Yes. I mean, partially clarified it, but I still have a question. So what you show on your presentation in slide 30. Basically, these graphs show that BCP Stand-alone CAT1 is 11.5% and Mibanco is 16.5%. Do these -- are these numbers that you just show calculated according to IFRS? Or calculated according to Peruvian local standard?

Walter Bayly -- Chief Executive Officer

It's local accounting, it's standard. The number are going to be lower.

Sergey Dubin -- Harding Loevner -- Analyst

Right? So, so for the rural that's what your show for IFRS, it would be 11.5 minus 60 bps. And for Mibanco would be 16.5 minus 300 days, correct?

Walter Bayly -- Chief Executive Officer

Yes. More or less.

Sergey Dubin -- Harding Loevner -- Analyst

Okay. That's helpful. My second question is on Mibanco, again, this is one of those issues where I'd like to have some more clarity. It looks like you have -- 71.9 legal contingency. How did this contingency arise and -- I mean Mibanco scandal happened 12 years ago. Why are you just showing this now? Can you give some background and some color around this whole issue?

Walter Bayly -- Chief Executive Officer

Sure. So Jay I'll tackle the madof, this relates to Mr. Picard, who was the court appointed liquidator. And I was trying to articulate global initiatives, I guess, some of the investors, I guess it's about 400 of them. And recent rulings by the Supreme court of the United States are not favorable to the utilization of the extra territoriality arguments. So we found it prudent to create provisions just to get over that.

Sergey Dubin -- Harding Loevner -- Analyst

So does it mean that you would be -- just to clarify, does it mean that you will be liable? Like you think that in a worst case scenario, you could be liable to pay PEN72 million to do this a quarter point that trustee for made up cases? Is that correct?

Walter Bayly -- Chief Executive Officer

We hope not, but we thought it was prudent to create the provision.

Sergey Dubin -- Harding Loevner -- Analyst

Okay. And I guess it's a rose because you advise your clients to put money in madoff, and then the client is now suing you, asking you to make up that difference essentially. Right. Is that, is that, how did that originate in the first place?

Cesar Rios -- Chief Financial Officer

Yeah, no. You've got it completely wrong. This is the clawback provisions. The concept here is that the court appointed liquidator is asking people that have had withdrawals from the funds in months or a certain short period prior to the whole scandal being blown up. That those people, that withdrew funds from this fund dated as valuation that did not reflect reality. Therefore they applied clawbacks, which means you sent the money back through the fund, the fund incorporates into the fund, and then redistributes the money back. We have long, long time ago settled with our customers. And we bought them back -- we bought back the investments at a certain negotiated value to them. So our customers have nothing to do with this. And since we bought back their participation in the fund, the crawback applies to us.

Sergey Dubin -- Harding Loevner -- Analyst

Okay. Okay. Now that you said that that's very clear, but before it was very vague. So now the other clarifies as good. Okay. My last question has to do with the insurer, sorry, the asset under management in your, you know fund management business, you said there could be some, something like PEN3 billion withdrawal. Can you just again, explain why -- why that is, is it because of the new legislation that's being passed? And can you just give some more color around keep the ratio?

Walter Bayly -- Chief Executive Officer

Okay, I think we are talking about Prima, Prima is happening from a private pension fund manager. And the attorneys are new legislation that allows clients to withdraw funds, the estimated amount of the new funds that are going to be withdrawn, according to this new legislation is 3 billion.

Sergey Dubin -- Harding Loevner -- Analyst

Okay. And is that again, is this the worst case scenario that you if everyone who can withdraw to the student draw or is that or is that your estimate of realistic scenario?

Walter Bayly -- Chief Executive Officer

Our best -- our best estimate. Our best estimate based on the previews withdrawal authorization process? It's not the old one.

Sergey Dubin -- Harding Loevner -- Analyst

Got you. And this trip delay will be how much of your total AUM? What percentage?

Walter Bayly -- Chief Executive Officer

Its going to be? Sorry?

Cesar Rios -- Chief Financial Officer

I think it's about 7%. So I think

Walter Bayly -- Chief Executive Officer

7%.

Sergey Dubin -- Harding Loevner -- Analyst

7%, Okay.

Walter Bayly -- Chief Executive Officer

7%, around 7%.

Sergey Dubin -- Harding Loevner -- Analyst

Got it. Got it. Okay. Perfect. Thank you very much.

Walter Bayly -- Chief Executive Officer

So just an additional clarification, please refer to the 20th. We're all this made of stuff is fully disclosed clear, and you can get a lot more information there if you need.

Sergey Dubin -- Harding Loevner -- Analyst

Okay, I will do that. Thank you. We'll do. Thanks.

Walter Bayly -- Chief Executive Officer

You're welcome.

Operator

Thank you very much. And now I would like to turn the conference back to Mr. Walter Bayly, Chief Executive Officer for closing remarks.

Walter Bayly -- Chief Executive Officer

Thank you, Santo. Well, thank you to all of you. This has been a very encouraging and important quarter for us. We now have shown the market evidence of what we have been perceiving in the last couple of months, namely that we are past the inflection point on several fronts. On the health side, the numbers reported are very encouraging. And hopefully they will continue this way. The economic activity of the second front is coming back to normal levels on several fronts, we are already there. And we estimate that by year end, or the first quarter of next year at the latest, we will be substantially on pre COVID levels on a monthly basis. The third and last inflection point refers to the impact of this very severe downturn in our portfolio. The numbers we have shown for this last quarter clearly indicate this inflection point. And we continue to see improvements week-by-week. We are emerging for the most severe economic crisis in the last 100 years. And we think it is unrealistic to expect the situation to get normalized in one or two quarters. The recovery path is laid out. And as we have indicated our guidelines -- in our guidelines, we expect to be back to return on equity in the high-teens. In the second half of 2022. Our franchises continue to be strong. The path to change and develop our business models and distribution to digital technologies has accelerated and continues to be a key element of our strategy. We thank you very much for your continued support. And with this, I conclude our quarterly phone call. Thank you very much.

Operator

[Operator Closing Remarks]

Duration: 90 minutes

Call participants:

Cesar Rios -- Chief Financial Officer

Walter Bayly -- Chief Executive Officer

Alvaro Correa -- Deputy Chief Executive Officer and Head of Insurance and Pension Funds

Gianfranco Ferrari -- Deputy Chief Executive Officer and Head of Universal Banking

Ernesto Gargando -- Bank of America -- Analyst

Jorge Kuri -- Morgan Stanley -- Analyst

Thiago Battista -- UBS -- Analyst

Jason Mollin -- Scotiabank -- Analyst

Tito Labarta -- Goldman Sachs -- Analyst

Geoffrey Elliott -- Autonomous -- Analyst

Brian Flores -- Citi -- Analyst

Carlos Gomez Lopez -- HSBC -- Analyst

Piedad Alessandri -- Credicorp Capital -- Analyst

Andre Soto -- Santander -- Analyst

Yuri Fernandes -- JPMorgan -- Analyst

Sergey Dubin -- Harding Loevner -- Analyst

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