April 19 (Reuters) - Fifth Third Bancorp posted a 10% drop in first-quarter profit on Friday as higher deposit costs weighed on the lender's interest income.

Regional banks have steadily increased the interest rates they offer on deposit accounts to retain customers looking for greater returns by parking their money in higher-yielding alternatives.

Cincinnati, Ohio-based Fifth Third's net interest income on a reported basis - the difference between what a bank earns on loans and pays on deposits - fell nearly 8.8% to $1.38 billion in the quarter.

Net interest margin contracted to 2.86% in the first quarter versus 3.29% in the year-ago period.

Fifth Third continues to expect its NII in 2024 to decline between 2% and 4%. Analysts on average expect it to fall 3.4%, according to LSEG data.

Regional peers U.S. Bancorp and KeyCorp reported their earnings on Thursday and posted similar NII declines.

Provision for credit losses fell to $94 million in the quarter from $164 million last year.

Higher interest rates have also tempered the demand for loans as borrowers sit on the sidelines waiting for rate cuts.

Fifth Third's total average portfolio loans and leases fell 4% to $117.33 billion in the quarter, hurt by a decrease in its consumer and commercial portfolios.

Meanwhile, the bank's total average deposits rose 5% to $168.12 billion, helped by higher interest checking and money market accounts.

The lender's net income available to common shareholders fell to $480 million, or 70 cents per share, for the three months ended March 31, from $535 million, or 78 cents per share, a year earlier.

Shares of Fifth Third have fallen 0.8% so far this year, through its previous close, compared to a 14.2% drop in the KBW Regional Banking Index. (Reporting by Arasu Kannagi Basil in Bengaluru; Editing by Ravi Prakash Kumar)