Lloyds Banking Group has seen first-quarter profits surge to £1.9 billion as it became the latest lender to cut reserves for bad debts on a better economic outlook.

The group’s results for the first three months of 2021, the last set for outgoing boss Antonio Horta-Osorio, beat expectations and compares with profits of £74 million a year earlier.

On an underlying basis, Lloyds saw profits jump to £2.1 billion from £558 million a year ago.

It comes as the group revealed a net impairment credit of £323 million, having released £459 million of provisions set aside for loan losses thanks to greater optimism over the UK’s economic recovery from the pandemic.

Rival HSBC also cut its reserves for loan losses on Tuesday thanks to greater optimism over the UK economy as the vaccination programme rolls out.

Lloyds said it now expects the UK economy to bounce back with 5% growth in 2021, against previous expectations of 3% expansion, while it also believes unemployment will peak at 7%, not 8%.

It has upgrade its outlook for the full year as a result on a range of measures, including its net interest margin, a key performance measure for retail lenders.

Shares in the group lifted 4% after the figures.

Mr Horta-Osorio, who leaves later this month after a decade in the role to become chairman of Swiss bank Credit Suisse, said: “Whilst we are seeing positive signs, notably the progress of the vaccine rollout and the emergence from lockdown restrictions, the outlook remains uncertain.”

He said he leaves with a mixture of “pride and sadness”, but added the “long-run transformation of the group has positioned the business well to address the challenges of the pandemic”.

He will be replaced by Charlie Nunn, the head of HSBC’s high street banking unit, who takes up the post in August.

Lloyds said it experienced its best month for mortgages since 2008 in March as the housing market enjoyed a bubble spurred on in part by the stamp duty holiday.

Its mortgage book increased by 6% year-on-year to £283.3 billion.

The group said it expects the mortgage market to grow at a slower pace once the stamp duty break ends in June, but that the housing market should continue to be buoyed by changes in buyer demand due to the pandemic.

Lloyds reiterated that it would “resume its progressive and sustainable ordinary dividend policy with the dividend at a higher level than 2020” and is hopeful that the City regulator will return the policy control to boards for the interim payout.

The Prudential Regulation Authority (PRA) stepped in last year to ban divis by banks at the height of the pandemic but allowed them – up to set limits – to make payouts to investors at the full-year stage.