April 17 (Reuters) - U.S. Bancorp cut its forecast for full-year interest income on Wednesday and reported a 22% fall in first-quarter profit as higher deposit costs and a larger corpus of rainy-day funds to cover potential defaults continue to weigh on the sector.

Lenders in the U.S. have been offering higher interest rates to retain deposits in recent months as customers increasingly seek better returns by placing their money in higher-yielding alternatives such as money-market funds.

Shares in the bank fell 3% in premarket trading after the results.

It now expects net interest income (NII), the difference between what banks pay customers on deposits and earn as interest on loans, between $16.1 billion and $16.4 billion for the full year. It had earlier forecast an NII of over $16.6 billion.

NII declined 14% to $3.99 billion in the first quarter, while net interest margin contracted to 2.70%, compared with 3.10% in the year-ago period.

"Despite a challenging interest rate environment and pressure on industry deposit levels, we again saw growth in consumer deposits during the quarter," CEO Andy Cecere said in a statement.

The Minneapolis, Minnesota-based bank said it expects NII in the current quarter to be relatively stable compared to first quarter levels.

Meanwhile, even as bets of a soft landing for the U.S. economy have increased amid resilient consumer spending and a tight labor market, the high-rate environment has put off potential borrowers, particularly those from the lower income bracket.

Provisions for credit losses or the capital banks use to cover loans that borrowers are unable to pay back, rose to $553 million in the quarter, compared with $427 million, a year earlier.

Net income attributable to U.S. Bancorp fell to $1.32 billion or 78 cents per diluted share in the first quarter compared to $1.7 billion or $1.04 per diluted share reported a year earlier. (Reporting by Manya Saini in Bengaluru; Editing by Tasim Zahid)