UBS and Credit Suisse (CS) should focus solely on private banking and pool their investment banks if plans for curbing the latter's risk-taking activities fail to appease shareholders, JPMorgan analyst Kian Abouhossein said.

If returns are still not adequate to shareholders, this is an alternative, Abouhossein said, commenting on a research note published on Tuesday.

Swiss regulator Finma, which would have to approve such a move, declined comment, as did UBS and CS.

An investment bank combination would represent an about-face for both big Swiss banks, which have reacted to a Swiss clamp-down on risk taking by shrinking the units, which both insist are still integral to their money-management arms for the wealthy.

UBS's and Credit Suisse's business models are identical -- large private banking arms linked to sophisticated investment banking services, which both banks are increasingly attempting to sell to well-heeled private clients.

At the same time, the two are slashing risk as international regulators call for banks to hold more capital in order to prevent a repeat of the 2008 and 2009 financial crisis, which led to a government-led bailout of UBS.

Last week, CS said it would cut another 1,500 jobs on top of 2,000 cuts already disclosed in July, which translate to 7 percent of its workforce. UBS is expected to disclose similar cuts when it faces investors next week.

The Swiss economy relies heavily on finance and a large part of Switzerland's finance sector stems from UBS and CS.

Yet the two could face pressure from shareholders to scale back their securities units even more than they already have, raising the spectre of something far more unorthodox like a tie-up, Abouhossein said.

MORE RISK

Sources familiar with the situation said practical difficulties in combining the two units include their capitalisation and funding. In addition, any combination would represent concentrating more risk in one entity, something the regulator has discouraged.

Following the government-led bailout of UBS in 2008, regulator Finma and the Swiss National Bank demanded UBS and CS back their riskier investment banking activities with far more capital. Both have done so, but have said the tougher capital requirements will drive them out of some businesses which soak up large amounts of capital.

However, shareholders pushing for returns may ultimately dictate banking strategy, Abouhossein said.

We know that the investor base, management and analysts all acknowledge return on equity is under pressure under new regulatory and Basel rules.

As a result, we applaud Credit Suisse for coming out with a restructuring plan, though clearly we would have liked them to go further than that. We expect UBS to go in a similar direction, more than we have seen at Credit Suisse.

A new unit should fund itself, instead of relying on funding from the parent banks, and continue to be overseen by the Swiss regulator, Abouhossein said.

Any combination of UBS's and Credit Suisse's investment banking arms would inevitably mean considerable job losses due to overlap.

Our view is that it would be hugely value-creative, although admittedly material in terms of cost-reductions as result of staff impacts. Ultimately it would create a lot of value for shareholders, Abouhossein said.

(Editing by David Holmes)