SAN Banco Santander SA

MADRID—Banco Santander SA downgraded two of its important financial targets on Friday, as major European banks feel the strain of a prolonged period of low interest rates and sluggish demand for loans.

Santander executives told investors at a presentation in London that the bank would step up cost-cutting efforts as well as focus on increasing fees to counterbalance a tougher macroeconomic outlook in Europe.

Santander lowered the target for its return on tangible equity, a measure of profitability, to "more than 11%" by 2018 from a previous target, set a year ago, of around 13% over the same period.

Santander reported a return on tangible equity of 11.09% at the end of June.

The bank also raised the target range for its cost-to-income ratio—a key measure of efficiency—to 45%-47% by 2018. The bank said last year it aimed for a cost-to-income ratio of below 45%. The lower the figure the better.

Citigroup analyst Stefan Nedialkov noted that the market consensus for Santander's 2018 return on tangible equity is 10%--already below the bank's new target.

"We believe today's rebasing of targets is the right thing to do," Mr. Nedialkov said in a research report. "The ROTE downgrade seems to be driven by a higher cost-to-income ratio, and potentially by slightly lower implied net interest income," which measures lending profitability.

Santander reiterated its target of reaching a capital ratio by the end of 2018 of more than 11% under international regulations known as "fully loaded" Basel III criteria. That ratio was 10.36% at the end of June.

Executives also laid out details of financial targets for the bank's main units in the U.K., Brazil and Spain.

In the U.K., where Santander generates around one quarter of its net profit, executives said the economic outlook has deteriorated in the past 12 months, after Britons voted in favor of leaving the European Union in July.

The bank said it anticipates lower economic growth, higher unemployment, lower-for-longer interest rates and a drop in housing prices over the next two years compared with what executives had expected pre-Brexit.

Santander downgraded its return-on-tangible equity target to 8%-10% in the U.K. by 2018 from a previous target set one year ago of 12%-14%.

The bank said its cost-to-income ratio target for 2018 is now 50%-52% from a previous target of less than 50%.

In Spain, the bank said it didn't expect to meet its previously set efficiency targets. The bank downgraded its cost-to-income ratio target to around 55% by 2018 versus a previous target of 50% a year ago.

Spanish banks, including Santander, have extensive and expensive branch networks spanning the country, and lenders are starting to shutter offices to cut costs amid low interest rates and tough competition that is hampering profitability.

Santander also slightly downgraded its return-on-tangible equity target for Spain.

In Brazil, Santander maintained its return-on-tangible equity target for 2018 of around 17%.

Santander shares were down 3.8% around 1030 GMT in Madrid, hit by its downgraded financial targets as well as broader market concerns about the health of German lender Deutsche Bank AG.

Write to Jeannette Neumann at jeannette.neumann@wsj.com

(END) Dow Jones Newswires

September 30, 2016 08:25 ET (12:25 GMT)

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