2.1.1. Asset Composition

The bank asset structure is an interesting bank-specific factor and the relationship with profitability is far from conclusive.

Also referred to as asset diversification, the ratio of total loans to total assets have a positive relationship in the literature, since asset diversification, e.g., hedge funds or other assets, is considered to increase profitability (Saona 2016). So, in general, loans have a positive influence on profitability, becauseasabank'scorebusiness,theyareamajorgeneratorofinterestincome(BikkerandHu2002).

 Based on this assumption, authors, like Bourke (1989); García-Herrero et al. (2009); Saona (2016); Trujillo-Ponce (2013) refer to a positive relationship between the relative percentage of loans in the assets of a bank and its profitability.

However, other authors pointed out that ambiguous e ffects depending on the profitability measure are considered (Valverde and Fernández 2007; Tan et al. 2017; Trabelsi and Trad 2017), while a negative relationship between the asset structure of banks and its profitability was obtained by Bikker and Hu (2002) or Rumler and Waschiczek (2016). A large set of loans implies higher operating costs and probably the premium put on long-term interest rates (as included in the credit rate), insu fficient cover for processing costs, credit losses and the cost of required capital reserves.

Consistent with this empirical evidence, the first hypothesis is stated:

**Hypothesis 1.** *There is a relationship between the asset bank's composition and its performance.*
