(Reuters) -Wells Fargo's ( WFC ) profit fell 7% in the first quarter on Friday as it became more costly to pay customers for deposits and demand from borrowers declined.

Still, adjusted profit of $1.26 per share came ahead of analysts' estimates of $1.11, according to LSEG data, helped by a nearly 5% revenue growth in its banking unit.

Wells Fargo's ( WFC ) shares were choppy in premarket trading. They were last up 1.4%, reversing from a decline earlier.

The bank's net interest income (NII) -- the difference between what it earns on loans and pays out for deposits -- fell 8% to $12.23 billion.

NII was hurt by higher interest rates on funding costs, including the impact of customers moving to higher yielding deposit products, as well as lower loan balances, the bank said.

Average loans fell $20.6 billion, or 2%, year-over-year, driven by declines in most loan categories.

The bank reiterated on Friday that its NII could fall 7% to 9% this year.

Wells Fargo ( WFC ) also paid $284 million into a Federal Deposit Insurance Corp fund that was drained last year after three regional lenders failed.

The shifting U.S. interest rate outlook is an important factor that will drive banks' future profits. U.S. consumer prices increased more than expected in March, leading financial markets to anticipate that the Federal Reserve would delay cutting rates until September.

Higher rates had boosted lenders' earnings as they brought in more money from interest payments, but that benefit waned in the first quarter of 2024.

The increased interest rate have also made it more costly for banks, prompting them to pay more to keep deposits from customers who are seeking higher yields.

Tighter monetary policy could also crimp borrower demand and dampen economic activity, including Wall Street dealmaking.

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Credit card lending was a bright spot, while auto lending suffered a sharp 23% fall in the quarter.

The bank is operating under a $1.95 trillion asset cap that prevents it from growing until regulators deem it has fixed problems from a fake accounts scandal.

The lender still has eight open consent orders after the U.S. Office of the Comptroller of the Currency (OCC) terminated a 2016 punishment in February.

"We reached an important milestone in the first quarter when the OCC announced the termination of a consent order it issued in 2016 regarding sales practices misconduct," CEO Charlie Scharf said in a statement.

"The remaining risk and control work continues to be our top priority and we will not be satisfied until all work is complete," he added.

Scharf became CEO in 2019, the fourth person to lead Wells Fargo ( WFC ) since the scandal first emerged. He has worked to turn the lender around, cutting costs and exiting businesses after it racked up billions in lawsuits and regulatory fines.

Overall, non-interest expenses rose 5% in the quarter, driven in part by customer remediation accruals for historical matters and higher FDIC assessments, the bank said.

(Reporting by Noor Zainab Hussain and Manya Saini in Bengaluru and Saeed Azhar in New York; Editing by Lananh Nguyen and Sriraj Kalluvila)