ZURICH (Reuters) -UBS should have spun off Credit Suisse's Swiss business, proxy adviser Ethos said on Thursday, after Switzerland's No. 1 bank annnounced plans to fully integrate its former rival's home market business.

"We are disappointed as the spin-off would (have) been a better option to avoid a major systemic risk for Switzerland, an important negative impact on employment and issues for the fair competition of the Swiss financial market," Ethos Director Vincent Kaufmann said in an emailed statement.

Ethos, which is composed of a number of Swiss pension funds and public utility foundations that held stakes in both groups before the merger, represents some 3%-5% of shares in the newly combined group, Kaufmann said.

Ethos, which has backed a class-action lawsuit seeking a better price from UBS for the takeover, said UBS' massive second-quarter financial gain related to the takeover - which the group reported as part of its earnings on Thursday - confirmed Credit Suisse was "significantly undervalued" in the deal.

(Reporting by Noele Illien; writing by Brenna Hughes Neghaiwi; editing by Friederike Heine)