SAO PAULO, Feb 7 (Reuters) - Brazil's biggest private sector lender Itau Unibanco expects to set aside more cash for bad loans this year as higher interest rates raise the risk of default, it said on Tuesday, as it posted a quarterly profit that missed forecasts.

Itau said its cost of credit for 2023, mainly comprised of provisions, will likely be between 36.5 and 40.5 billion reais ($7.77 billion), up from 32.3 billion reais in 2022.

It set aside provisions of 9.9 billion reais in the last three months of last year, up 45.1% from a year earlier.

Analysts at Citi called the provisions forecast "conservative," saying it could surprise positively and praising the bank's "relatively stable" asset quality.

Citi said Itau's forecasts reaffirmed strong earnings ahead of a challenging year: "We believe that investors' expectations have been deteriorating in recent weeks for the banking sector, given a worsening in asset quality in the corporate segment," it said.

Brazil's central bank held interest rates steady at 13.75% at a fourth straight policy meeting early this month, prompting President Luiz Inacio Lula da Silva to criticize a "culture of high rates."

High interest rates drove rival Santander Brasil SA to miss analysts' quarterly forecasts last week.

Itau reported a recurring net profit, which excludes one-off items, of 7.67 billion reais, up 7.1% but still below the 8.24 billion reais estimated by analysts polled by Refinitiv.

It said its profits were hurt by an extra provision of about 719 million reais related to what Itau called a "specific case of a large company that entered into bankruptcy protection."

It did not name the company.

Last week, Santander Brasil reported extra provisions, related to the bankruptcy of retailer Americanas SA.

However, Itau predicted that its net interest income from clients could leap to 13.5%-16.5% in 2023, helped by higher borrowing costs.

Its fourth-quarter net interest income rose 17.8% from a year earlier, to 24.97 billion reais, backed mainly by a higher average credit volume and bigger margins.

The company's return on equity, a gauge of profitability, came in at 19.3%, compared to 21% in the previous quarter.

Itau also predicted that its loan book will grow from 6% to 9%, while revenue from services and its insurance business are seen increasing by 7.5%-10.5% in the year.

Despite the bank's caution about the risk of default, its 90-day loan default ratio landed at 2.95%, slightly above the 2.8% reported at the end of September. Its loan book reached 1.14 trillion reais in the period. ($1 = 5.2123 reais) (Reporting by Peter Frontini Editing by Sarah Morland and Aurora Ellis)