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UPDATE 2-Santander sees tougher times ahead as cuts profitability goal

* Santander cuts 2018 profitability target to 11 from 13 pct

* Business context worse in key markets, such as UK

* Reaffirms 2018 dividend, capital ratio, EPS targets

* Santander shares down 3.4 pct in weaker bank sector (Adds details on core markets, analyst comment)

By Jesús Aguado and Angus Berwick

MADRID, Sept 30 Banco Santander gave investors a sobering assessment of its prospects in Britain and Spain on Friday, with a warning that it would be less profitable than expected in the years ahead, knocking the Spanish bank's shares.

Santander, the eurozone's biggest lender by market value, joined other banks in warning that low interest rates, Britain's decision to leave the European Union and higher regulatory and tax pressure were weighing on its business projections.

However, it said this would be offset by stronger business in emerging markets, such as a slow but steady improvement in Brazil, it's second biggest market.

Santander's chairman Ana Botin said at the bank's investor day in London that this "challenging environment" had led to a depreciation of many currencies against the euro and an expectation that interest rates would remain at record low levels for longer than expected.

At a group level the bank trimmed its return on tangible equity ratio (ROTE) target - a key measure of profitability - for 2018 to just above 11 percent, against the 13 percent target it set itself last year.

The bank also expected its costs to rise in relation to its income to a range of between 45 percent and 47 percent by 2018, against last year's objective of below 45 percent.

Santander's shares were down 3.4 percent by 1100 GMT against a 2.2 percent drop on the European STOXX banking index. European banks were pulled lower by fresh concerns over the stability of Germany's Deutsche Bank whose shares fell nearly 9 percent.

In addition to its challenges in Britain, low interest rates and aggressive pricing continue to pressure Santander's margins in Spain, mirroring the experience of other Spanish banks, and its net profit there was down almost a third in the second quarter against the previous three months.

In Britain and Spain, Santanders first and third biggest markets respectively, the bank cut its 2018 profitability target by several percentage points.

But a 20 percent profit rise in Brazil in the second quarter pointed to a recovery in a country stuck in its worst recession in a century. Brazil was the only one of Santander's three key markets where it kept its profitability and efficiency targets unchanged.

The bank reaffirmed on Friday other 2018 targets such as boosting its fully-loaded core capital ratio, a closely watched measure of a bank's strength, to just above 11 percent, a move which was welcomed by analysts.

On the new targets, analysts at JP Morgan said Santander's "lowered ambitions" were disappointing, but they were in line with their forecasts. Bankers had expected Santander to announce new cost savings after recently committing to slashing its number of branches in Spain, but it said nothing about any more.

Santander also confirmed its plans to increase earnings per share (EPS) in 2016 and 2017, reaching double digits by 2018, and stuck to its 2018 objective of a 30 percent to 40 percent cash dividend payout. (Editing by Alexander Smith)

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