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Spain's Santander raises 2018 profitability target

FILE PHOTO: A woman walks past Santander bank branch in Rio de Janeiro October 7, 2009. REUTERS/Sergio Moraes/File Photo

By Jesús Aguado

MADRID (Reuters) - Banco Santander shrugged off domestic political turmoil to raise its profitability forecast for next year thanks to stronger economic outlooks in some of its core markets.

But Santander's positive update was in part overshadowed by Catalonia's independence drive and its potential fallout on financial markets after Catalan lenders Banco Sabadell and Caixabank decided to move their legal headquarters out of the region.

Santander's shares closed down around 2.9 percent against a 0.27 percent drop on the European STOXX banking index.

Several brokers said that overall the bank's strategy update offered little in terms of surprises and most of its targets had already been achieved.

In a presentation to investors in New York, Spain's biggest bank increased its return on tangible equity (ROTE) target - a key measure of profitability - for 2018 to over 11.5 percent from a prior estimate of 11 percent set out in a strategy plan last year.

Like its European rivals, Santander is struggling to increase earnings from its lending business in Spain where interest rates hover at historic lows and increasing competition is eroding margins.

But the bank managed to partially offset the financial margin squeeze in the second quarter relying on its Latin American businesses, such as Brazil, which accounts for 26 percent of its earnings, and Mexico, responsible for around 7 percent.

Banco Santander's chairwoman Ana Botin said on Tuesday the bank continued to see excellent growth in Latin America as well as positive trends across both Europe and the United States, where it is focusing on the integration of its U.S. operations and cost savings to improve efficiency.

In Britain and Mexico, the lender's second and fourth-largest markets, the bank raised its 2018 profitability targets to the higher end of its previous target range for Britain and by several percentage points in Mexico.

"In the UK, while GDP growth has slowed, performance has been better than we had expected," Botin said in a statement.

At a group level, revenues in the second quarter were also boosted by Banco Popular.

European authorities stepped in to prevent a collapse of Banco Popular in June following a run on the bank, orchestrating a last-minute rescue by Santander, which bought it for a nominal one euro..

The market had expected some update to the estimated annual 500 million euros (447 million pounds) in cost synergies Santander plans to generate from 2020 via the Popular acquisition but Santander did not provide any new details.

The bank said that since it launched an offer two weeks ago to compensate clients hit by the Popular rescue, more than 50 percent had accepted the compensation.

Santander also reiterated on Tuesday its remaining goals for 2018, including a target to reach double-digit growth in earnings per share and also kept its plans to pay 30 to 40 percent of its recurring profits in cash dividends.

Santander, which has been lagging behind its main European peers in terms of core solvency ratios, also maintained a fully loaded capital target of above 11 percent.

The lender also kept its cost to income ratio target in a range of between 45 percent and 47 percent.

(Editing by Paul Day/Keith Weir and Jane Merriman)