Net income declined to $4.62 billion, or $1.20 per share, for the three months ended March 31, the lender reported on Friday. That compared with $4.99 billion, or $1.23 per share, a year earlier.

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

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-for-longer rates could boost lenders' earnings as they bring in more money from interest payments.

But the interest rate increases have also made it more costly for banks, prompting them to pay more to keep deposits from customers who are seeking higher yields for their money. Tighter monetary policy could also crimp borrower demand and dampen economic activity, including Wall Street dealmaking.

Wells Fargo said in January that its net interest income (NII) could fall 7% to 9% this year.

Wells Fargo is operating under a $1.95 trillion asset cap that prevents it from growing until regulators deem the bank 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 terminated a 2016 punishment in February.

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