SAN Banco Santander SA

MADRID—Spaniards set to lose their banking jobs in the coming months might fault their bank bosses. They should save some blame for Mario Draghi.

Mr. Draghi, the head of the eurozone's central bank, has repeatedly cut interest rates to jolt Europe's economic growth. Last Thursday he said the European Central Bank was willing to use "all instruments available," including additional rate cuts, to spur expansion.

While some consumers and businesses have benefited from lower payments on their loans, subzero rates have chipped away at banks' profitability. In Spain this has forced banks to cut costs.

Banco Santander SA, the eurozone's largest lender by market value, announced this month that it is closing 450 smaller bank branches and cutting up to 1,660 positions in Spain this year, according to an internal staff memo and a person close to the bank.

Spain's No. 3 bank, CaixaBank SA, said it has reached early retirement agreements with up to 484 employees to trim salary expenses. Small regional lender Liberbank SA has plans to shutter up to 25% of its bank branches during the next two years and peer Banco CEISS has announced it will cut up to 1,120 jobs.

When major Spanish lenders report their first-quarter earnings this week, analysts expect an overall weak set of results—and further impetus for slashing costs.

Executives at Spanish banks are seasoned at closing offices and cutting staff. A property boom went bust in 2008, forcing dozens of weaker lenders to close, merge or be purchased. With help of a European Union bailout, the banking sector recovered and Spain grew out of a recession. But now the banks face gale-force headwinds—negative interest rates, lackluster demand for home mortgages, muted returns on business loans—that show no signs of subsiding.

"Spain's financial sector is confronting a period of great change," Santander Spain country head Rami Aboukhair wrote in a memo to employees explaining the branch closures and layoffs. "The current economic context, greater regulatory requirements and the evolution of client behavior toward new technology makes it necessary to move more quickly in our commercial transformation."

Another factor in branch closures in Spain is the shifting habits of clients, bank executives say. Younger Spaniards in particular shun visits to physical offices in favor of online clicks to take out a consumer loan or make a payment.

Overall, however, the cutbacks are aimed primarily at offsetting a long decline in the banks' earnings. Their net interest income and fees fell by 31% from December 2009 to December 2015, while operating costs declined by 12.5%, according to data from Spain's central bank.

"Profitability is under a lot of pressure," Citigroup analyst Stefan Nedialkov said. That's "the urgency that is making the banks focus more on costs now. Digital is definitely a factor, too, but it's not the driving factor."

Spanish banks cost-to-income ratios "were always best in class," Mr. Nedialkov said. "But now top line growth isn't there," he added, and that is forcing banks to rethink a model that prioritizes a physical presence in communities throughout Spain.

Spain has more branches per person than any other country in the EU except Cyprus, according to ECB data through 2014. Even after a 26% decline in branches between 2010 and 2014, Spain has around three times as many bank branches as the U.K.

"We will see less capillarity in the financial system in Spain" in coming years, Banco de Sabadell SA Chief Executive Jaime Guardiola told journalists on Friday. "Progress has already been made."

Bank profits have been hit especially hard by a decline in the euro interbank offered rate. Euribor, as the benchmark is known, underpins most Spanish mortgages, which fluctuate when the interest rate changes. The 12-month Euribor has plummeted from 2.12% in April 2011 to around -0.01 this month.

Starting several years ago, most Spanish banks included interest-rate floors in their mortgage contracts—a limit on how far borrowers' monthly payments could fall. But Spanish courts have ruled that many of those mortgage floors weren't spelled out clearly enough to consumers and ordered them to be removed, triggering a drop in bank revenue.

Spain's economy has posted strong growth in the past two years, but demand for mortgages remains historically weak as borrowers choose instead to pay off existing debt. That has forced Spanish banks to rely more on business loans. But they all did so en masse, driving down the interest rates they charge, another hit to profits.

Low interest rates means that banks, for instance, also pay customers less for their deposits. But those lower funding costs haven't been enough to offset the other negative trends.

In May of last year, Santander introduced a new higher interest checking account in Spain. It was a costly launch, at least in the short term, for Santander itself as well as for rivals who tried to match the offer.

That has been a further drag on Spanish banks' profits.

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

(END) Dow Jones Newswires

April 26, 2016 06:45 ET (10:45 GMT)

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