* Value of HSBC's Japan private banking assets $2.7 bln
* CS began onshore private banking in Japan in 2009
* Sale part of HSBC's strategy to quit areas where it lacks scale
By Saeed Azhar and Chikafumi Hodo
SINGAPORE/TOKYO, Dec 21 (Reuters) - HSBC, Europe's biggest bank, is retreating from Japan's private banking market, selling a business that serves the wealthy to Credit Suisse < CSGN.VX >, which is raising its profile in the world's second-largest market for millionaires.
The sale is part of a strategy outlined by HSBC in May. CEO Stuart Gulliver wants to cut annual costs by $3.5 billion and sharpen the bank's focus on Asia by quitting countries or businesses where it lacks scale.
HSBC said the gross assets of the business being sold were worth $2.7 billion at end-October, but it gave no sale price.
"(HSBC) is focusing on raising its return on equity and cutting costs, so it will focus on the high growth business," said Daniel So, Sun Hung Kai Financial strategist in Hong Kong.
"They probably don't see much growth potential in the Japanese market, so will do better to focus resources in other countries in the Asia-Pacific region."
Asia is a battleground for global and local private banks competing for market share in a region that is fast outpacing the United States and Europe in economic growth.
Powered by China and India, Asia-Pacific's millionaire ranks rose 10 percent to 3.3 million last year, just behind the 3.4 million in North America and ahead of Europe's 3.1 million, according to a Merrill Lynch/Capgemini Asia-Pacific wealth report.
Asia's combined wealth rose 12 percent to $10.8 trillion last year to overtake Europe and close in on North America, where wealth rose 9 percent to $11.6 trillion. More than half the world's millionaires are still to be found in the United States, Japan and Germany.
Asia's private banking industry has seen consolidation recently as the market turmoil dampens growth, and rising regulatory and staffing costs dent profitability.
Swiss private bank Julius Baer said in October it was buying the Asian private wealth portfolio of Australia's top investment bank Macquarie Group.
HSBC will sell its top-tier Japanese private banking business, which covers clients who hold more than 200 million yen ($2.57 million) in financial assets, said an official at HSBC Japan, who spoke on condition of anonymity.
But it will retain HSBC Premier, the private banking service that covers clients who hold more than 10 million yen in assets, the official said, declining to provide details on the number of staff involved in the bank's top-tier private bank section.
Credit Suisse said it plans to expand client coverage through integrating new offices in Nagoya and Osaka in western Japan and aims to boost profitability. Currently the Swiss bank, which has targeted Japanese investors holding more than 1 billion yen in assets, has an office in Tokyo.
Japan has 1.7 million millionaires in dollar terms, and is by far the single largest market for high net worth individuals in the Asia-Pacific region, accounting for 52.5 percent of the region's millionaires and 38.2 percent of its wealth at end-2010, according to the wealth report.
Japanese millionaires had assets of about $4.135 trillion at the end of 2010, the report said.
Junya Tani, head of private banking for Credit Suisse in Japan, said the deal showed the bank's "commitment to build a leading private banking business in Japan, acquire assets and drive profitability."
"Since we began our onshore private banking business in 2009, progress has exceeded expectations, and we are looking forward to building on this success with this acquisition."
Credit Suisse said its private banking business in the Asia-Pacific region has been among the fastest-growing of its international wealth management businesses, with annual double-digit growth in net new assets.
Rival UBS has also been strengthening its business in Japan and Asia-Pacific. Still, the Japanese private banking industry is dominated by local banks, analysts said.
HSBC last month reported a 36 percent fall in third-quarter profits as the euro zone debt crisis hit investment bank income, while strains in the U.S. economy saw bad debts there jump by almost $1 billion, the first rise in two years.
HSBC has said it will retreat from 14 countries, including selling its U.S. credit card business and branches in New York state, retail businesses in Russia and Poland, and its Canadian brokerage business.
"It's just indicative of the bank trying to become a little more lean, a little more focused," said Daniel Tabbush, regional banking analyst at CLSA. "It shows how big this bank really is. They've got things everywhere and could divest (some)."
HSBC also said on Wednesday that Dar Es Salaam Investment Bank, a 70.1 percent-owned subsidiary of HSBC Asia Holdings BV, sold its near-20 percent interest in Iraqi insurer Dar Es Salaam Insurance to Gulf Insurance Co for about $1.3 million.
HSBC shares were up 2.25 percent in Hong Kong.
The acquisition, which needs regulatory approval, is expected to close in mid-2012.