Many of Europe's big private banks — those that once relied on less-transparent offshore business — have turned their sights to the continent's growing pool of onshore wealth. Whether they can tap these riches generated by company sales, IPOs and share option schemes in a cost-effective way remains to be seen.

UBS and Credit Suisse have launched independent domestic banking operations while HSBC offers full banking services in many countries and seeks to tap this network for client referrals and product distribution.

Julius Baer has found a cheaper solution than its Swiss rivals by forming a joint venture with Banco Credito Valtellinese, for example, in Italy. Smaller players such as Banque Syz have bought into asset managers with similar alternative investment expertise in Italy and Spain.

Deutsche Bank Private Banking has some offices in the main European domestic markets while it serves Eastern Europe from Vienna. Barclays Private Banking has offices two offices in Spain and two in Portugal.

Since UBS launched its European Wealth Initiative in 2001, it has recruited 445 relationship managers to staff 21 offices across the five target countries holding 80 per cent of Europe's wealth: Germany, France, Italy, Spain and the UK.

This year, UBS said the initiative had exceeded business targets but declined to give a breakdown of investment or returns. Costs have been considerable. One source said UBS had to juggle the books slightly to finance it "under cover of their international asset base".

"It cost them a lot, but it's not seen because they paid with international money, which was the right way to do it," the source said.

The banks say the initiative accounts for SFr23bn in assets under management. Unlike UBS, which is targeting the high net-worth segment, CSPB's approach has been to target private clients too but also cast a wider net, offering affluent clients financial products and services, such as Winterthur insurance.

Since launching the European Financial Services Initiative three years ago, CSPB has opened 63 offices in Germany, Italy and Spain. A spokesman said the bank was already active in France and the UK but would only launch the initiative in those countries if economic conditions improved or it found local partners.

Last month Credit Suisse reported that by the first quarter of 2002, it had 658 advisors serving a client base of 45,494.

This year the initiative, which has appeared to be a drain on more buoyant parts of the group, was boosted by the Italian government's tax amnesty. Credit Suisse estimated asset outflows of SFr2bn to SFr3bn as funds were repatriated to Italy, but said the bank had been well positioned to welcome most of this with SFr3.2bn new money "of which 80 per cent relates to the Italian market".

HSBC Republic is also trying to tap Europe's onshore wealth, but it prefers to grow through acquisition. It is still working hard to digest French private bank CCF, after its takeover in 2000, but once operations have been streamlined it can use this network to tap into France and Italy. HSBC has taken over the CCF office in Milan and is planning to open a second in Rome.

"The markets in southern Europe are more ripe for development, because Northern Europe is over-banked — the same in Scandinavia, Holland, Germany and Austria," said Ian Ewart, HSBC Republic global head of marketing and communications.

"Everyone is looking at Spain but there is something to be said for France, Italy and if you look further east, Greece and Turkey."

Analysts agree that Europe's onshore wealth is an attractive market but question how quickly these strategies can reach profitability.

"If we look at trend, growth is more likely to be generated from the onshore rather than offshore [business]. There is common agreement on that," said Philippe Theytaz, co-author of PwC's European Private Banking survey.

"The question is should we look at this as short-term profitability or as a more strategic direction that will take some time. I say the latter — long term," Theytaz said.

Claudia von Turk, a banking analyst at Pictet & Cie, agreed but said that if weak market conditions continued it could take five or even ten years for banks such as UBS and Credit Suisse to achieve profitability, which could try shareholders' patience.

Clients may be offered a wider choice of products and private banking expertise that they may not otherwise find at home. Von Turk said there was no question as to whether banks like UBS or Credit Suisse were able to compete against local incumbents.

"Clients appear to be very satisfied, but once incumbents wake up to the potential in their networks they might start investing, upgrading their services because they don't want to sit and watch while their clients are taken away," von Turk said.

Some research groups have published reports stressing the vast potential of the European onshore market, such as Datamonitor's European High Net Worth Customers 2002.

Others are more cautious, like Boston Consulting Group, which concluded in a study last year that, despite an increase in "regulatory intervention," relaxation of exchange controls, the development of investment markets and reduction of political risk in some countries, it was a "myth" to regard the offshore market as dying.

Boston argued that although more wealth was declared, this did not mean clients wanted to keep it onshore.

"As much as half of the offshore wealth is both legally and fiscally 'clean' — that is, its provenance and tax status are legal. Managers should examine the offshore model and assess how well it fits with their current businesses and their customers' needs. It may well be the best way to build global capabilities," it said.

Incumbents in Europe's domestic markets are quick to defend their patch, particularly in countries like the UK with a long tradition of private banking.

Theytaz said although the statistics may look good on paper, the success of the onshore strategy was as-yet uncertain, partly because this demands new expertise in some respects.

"Few banks have been successful so far in creating a strong base outside their domestic market. French banks are strong in France, UK banks in the UK, German banks in Germany. Some emerging markets like Italy and Spain are probably more ripe for competition for non-domestic players to gain market share."

Marcus Gregson, head of HSBC Private Banking in London, said challengers from Switzerland and elsewhere faced an uphill battle. "[Following] three years of falling markets, any investment goes a bit flat and it's difficult to win new clients. The whole environment today is immeasurably tougher than three years ago," Gregson said.

"If it's that easy why isn't everyone doing it? The reason is because it's much harder."