Sir Brian Pitman, the bank's chairman, said yesterday that "preconditions for mergers are more auspicious than they were," adding that "for weaker players the confidence of ever upwards profits has been lost".
Operating costs continue to fall sharply, with the group promising further savings on top of the pounds 400m a year pledged at the time of the Lloyds-TSB deal.
The bank, he said, still saw some opportunities for consolidation in the UK, particularly in the mortgage market, although the issue of competition in small business lending meant there was little chance of getting a clearing bank merger through.
However, he would not rule out deals abroad, provided the bank's tough acquisition criteria could be met.
"Some of the cross-border mergers seem to have destroyed value," Sir Brian said.
But he pointed out: "There is no doubt that a transformation of the financial services industry is happening all over the world.
"A deal has to strengthen our competitive position, add to our skills and meet our economic test."
Sir Brian's upbeat remarks at the start of the annual reporting season for the banks sparked a sharp rise in share prices across the sector as a whole.
Rival Barclays, still basking in the glow of the warm reception to yesterday's appointment of a new American chief executive, jumped 93p to 1513p, Natwest rose 70p to 1225, and Lloyds itself rose 67.5p to 852p.
Lloyds shares have been hit repeatedly by fears of big Latin American losses. However, yesterday's figures showed profits in Latin America were up despite tighter economic conditions in Brazil. Analysts say that given the bank's track record on handling acquisitions, and the high rating of its shares, it is one of the few British banks that could muster shareholder support for a major deal abroad.
Sir Brian said that with return on equity of 33 per cent, and plenty on which potentially to spend, the bank saw no need to contemplate a share buyback.
However, the bank has kept shareholders sweet with a 29 per cent increase in the dividend payout to 22.9p for the year.
Income was up 6 per cent to pounds 7.43bn, despite tougher market conditions. Although statutory profits were down 5 per cent to pounds 3bn reflecting the pounds 400m provision for pensions misselling taken in the first half, there was a strong rebound in second half profits which the bank believes is continuing this year.
Sir Brian said he believed that the threat of recession had been averted and that while bad debts were bound to rise, the pace at which interest rates are falling meant he did not expect a repetition of the early 1990s when widespread corporate collapses and home repossessions drove several of the big banks into loss.
"We do see a slowdown but not rampant recession," he said. "It really is different this time."