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UPDATE 1-Spain's Santander raises 2018 profitability target

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MADRID, Oct 10 (Reuters) - Spain's Banco Santander shrugged off domestic political turmoil to lift its profitability forecast for next year thanks to stronger economic outlooks in most of its core markets.

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

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

Santander's shares were down around 2.5 percent by 1320 GMT against a 0.34 percent drop on the European STOXX banking index .

Like its European rivals, Santander is struggling to lift earnings from loans in Spain as interest rates hover at historic lows while increasing competition erodes margins.

But the lender managed to partially offset the financial margin squeeze in the second quarter though a buoyant Brazilian business, which accounts for 26 percent of its earnings, and a revenue boost from Banco Popular.

European authorities stepped in to avert 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.

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.

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

Santander also reiterated its remaining goals for 2018, including a target to reach double digit growth in earnings per share (EPS) 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 to a range of between 45 percent and 47 percent.

(Editing by Paul Day/Keith Weir)