THE Bank of England yesterday said conditions for consolidation in the UK banking sector remain favourable and several large banks that have surplus capital may think about acquisitions this year.

The Bank, in its annual report on the banking industry, noted there had been less consolidation in the banking sector during 1997 but said there had been ''intense speculation about possible mergers and acquisitions''.

''A number of the successful mergers in the UK have shown you can take a substantial slug out of the cost base and make an improved return on equity,'' Michael Foot, who will become managing director and head of financial supervision at Britain's Financial Services Authority, told a news conference.

He said there is plenty of scope for cost-cutting mergers of that kind.

''One would be surprised if there were not more (mergers) involving UK companies,'' Foot, who is also an executive director of the Bank, added.

There have been a series of rumours concerning bank mergers and some preliminary approaches which have come to nothing.

One of the most intense of these episodes was last year's approach by Barclays to National Westminster Bank which was rebuffed.

NatWest itself had earlier approached Abbey National , and this year there were further rumours about Barclays tying up with Standard Chartered.

But analysts say that any merger, such as that mooted between Barclays and NatWest, that would produce very high market shares in key sectors would be unlikely to pass regulatory hurdles.

The Bank said there is little evidence of a repeat of banks' lending activity in the late 1980s which led to heavy loan losses in commercial property and construction in the recession of the early 1990s.

''Nevertheless, in the past the late stages of the cycle have proved particularly critical for banks: a significant proportion of what ultimately turn out to be bad debts have been put on the books at around that stage,'' the report said.

''It is therefore important that banks and supervisors remain vigilant.''

The report said the effects on large UK banks of the turmoil in Asia has been limited and that provisioning levels against bad debts have been modest as exposures are being actively managed.

''Although the position of some countries (in Asia) has improved, the crisis is not yet over,'' the report added. ''Banking supervisors will therefore continue to monitor institutions affected.'' - Reuters.