(Reuters) -BNY's profit jumped in the second quarter, the Wall Street bank reported on Tuesday, driven by higher interest income and fee revenue growth, as client portfolios swelled due to a recovery in the equity market.

A late-quarter rally driven by hopes of trade deals and possible rate cuts lifted major U.S. indexes and improved sentiment. Shifting U.S. tariff policies and mounting geopolitical tensions had whipsawed the markets earlier in the quarter.

BNY's assets under custody and administration rose 13% in the quarter ended June 30 to $55.8 trillion from a year earlier.

The world's largest custodian bank said the increase reflected higher market values, client inflows and the favorable impact of the weaker U.S. dollar.

Its total revenue climbed 9% and exceeded $5 billion for the first time in a quarter.

Net interest income (NII) - the spread between earnings from assets and costs on liabilities - also rose 17%. Analysts on average had forecast growth of 11.8%, according to estimates compiled by LSEG.

Profit applicable to BNY shareholders came in at $1.39 billion, or $1.93 per share, compared with $1.14 billion, or $1.52 per share, a year earlier.

Assets under management rose 3% over the same period.

SECURITIES SERVICES SHINES

The bank's asset servicing business, which handles the safekeeping and settlement of trades, posted a 7% rise in revenue. Meanwhile, its issuer services segment, which supports clients issuing securities, reported a 17% increase.

Total fee revenue rose 7% to $3.64 billion, compared with the year-ago quarter.

"BNY's ongoing transformation has significant momentum," CEO Robin Vince said in a statement. "Only one year after the launch of our new commercial model last summer, we delivered two consecutive quarters of record sales in the first half of the year."

Custodian banks play a critical role in global markets by safeguarding trillions of dollars in client assets, handling the settlement of trades, and ensuring a smooth transfer of securities and cash between financial institutions.

Last month, the Wall Street Journal reported that BNY had approached smaller rival Northern Trust about a potential merger. Chicago-based Northern Trust later said it remained fully committed to staying independent.

Dealmaking in the sector is expected to pick up in the second half of the year.

But analysts have said a tie-up between BNY and Northern Trust is unlikely, citing doubts over Northern Trust's interest in selling and the regulatory hurdles in a merger of two globally significant banks. They added that BNY could instead pursue a different target.

(Reporting by Manya Saini in Bengaluru and Nivedita Balu in Toronto; Editing by Shinjini Ganguli)