* Merger likely to be completed by autumn 2010 -sources
* Former Ashikaga Bank head to lead merged bank -Nikkei
* Analyst: Combined bank needs better strategy
* Aozora's shares up 4.2 pct, Shinsei climbs 1.3 pct (Adds analyst comment, background)
By Taro Fuse and David Dolan
TOKYO, June 30 (Reuters) - Japan's Shinsei Bank and Aozora Bank, two loss-making lenders backed by U.S. investors, are likely to announce plans on Wednesday to merge by next year, two sources familiar with the matter said.
The deal, which will create Japan's sixth-largest bank by assets, will likely be completed by the autumn of 2010, said the sources, who declined to be identified because the information is not yet public.
The merger ratio is likely to be set at one-to-one, the Nikkei newspaper said, without saying where it got the information. That would give Shinsei 55.5 percent of the new entity and Aozora 44.5 percent, according to Reuters calculations.
"Shinsei has a retail franchise and deposit network that Aozora lacks and Aozora has a relatively stronger capital base," said Kristine Li, Japan banking analyst at KBC Securities.
"But they need to come up with a better strategy to survive and be profitable in this very competitive market."
Norito Ikeda, a former president of Japanese regional lender Ashikaga Bank, will take the helm of the merged entity, the Nikkei said.
The banks last week acknowledged for the first time that they were in merger talks. Domestic media had previously reported that disagreements between the banks' major shareholders had sidelined the discussions.
Aozora is majority owned by Cerberus Capital Management, while Shinsei is about one-third owned by buyout firm JC Flowers and Co.
Representatives of Shinsei and Aozora declined to comment.
HEAVY LOSSES
The combined bank would have assets of about 18 trillion yen ($188 billion), putting it closer in size to rivals such as Resona Holdings and Sumitomo Trust and Banking.
The new bank would overtake Chuo Mitsui Trust Holdings as Japan's sixth-largest in terms of assets.
The market value of both Shinsei and Aozora has been eroded in the last two years, due to losses on U.S. subprime mortgages and other toxic assets.
In the financial year that ended in March, Shinsei lost 143 billion yen while Aozora lost 242.6 billion yen. Both banks have said they aim to focus on domestic lending after losing money on overseas investments.
But analysts have said the two will face a tough slog in Japan, where the domestic loan market is controlled by local powerhouses such as Mitsubishi UFJ Financial Group, Sumitomo Mitsui Financial Group and scores of regional lenders.
Ratings agency Fitch Ratings said this week that a merger alone may not improve the banks' business models or immediately increase earnings power.
Shinsei focuses on retail banking and consumer finance while Aozora has concentrated on corporate finance and real estate, meaning there may be little room for gaining economies of scale, Fitch said.
Both Shinsei and Aozora were nationalised following Japan's banking crisis a decade ago and later sold to foreigners, who were criticised by the Japanese media for making massive windfalls on bad banks.
The two banks and their American owners have been criticised for losing billions of yen on risky investments while still owing money to the government.
Japan's government pumped a total of 621 billion yen into the two banks and their predecessors and is still owed more than half of that.
Aozora's shares climbed 4.2 percent to 149 yen while Shinsei's stock rose 1.3 percent to 155 yen, outperforming a 0.6 percent rise in Tokyo's banking subindex. (Editing by Michael Watson)