The group, which is undertaking a major rebrand from its historic Clydesdale and Yorkshire banking names, said it was releasing £19 million of cash set aside for loans that could turn sour in its third quarter.
It added that the remaining £678m of provisions could be slashed further alongside full-year results if the rebound in the wider economy continues.
The group upped the outlook for its net interest margin – a key measure of profitability for retail banks – in a welcome boost after seeing margins squeezed by rock bottom interest rates.
It posted a 0.7 per cent rise in mortgage lending to £58.7 billion for the three months to June 30, helped by the homebuyer rush to beat the end of full stamp duty relief.
Personal lending grew 2.5 per cent to £5.2bn, driven by credit card usage as consumer spending rose amid easing coronavirus restrictions.
This helped offset a 2.4 per cent drop in business lending as the government’s Covid-19 support schemes began to wind down.
It said government-backed lending balances fell 3.2 per cent to £1.4bn as some borrowers started to repay, with many of these emergency loans now becoming due.
The firm said: “The UK economic outlook improved further in the third quarter. While risks remain from the increase in Covid case numbers driven by the new variants and the impact of the removal of government support schemes later in the year, the strengthening backdrop gives scope for greater optimism about the pace of the recovery.”
John Moore, senior investment manager at Brewin Dolphin, noted: “In the main, Virgin Money’s results are a continuation of the trends that have shaped them over the last few quarters – cost reduction, innovation helping net interest margins, and an improving macro-economic outlook.
“The bank is reasonably well capitalised and continuing to turn round its fortunes, with the share price recovering from falls before Covid-19 began to affect markets last year.”