By Ateev Bhandari

Oct 17 (Reuters) - State Street's net interest

income missed Wall Street estimates, sending the custodian

bank's shares down 5% on Friday, overshadowing the higher fees

it reported in the third quarter.

While the majority of a custodian bank's fees is tied to the

value of assets it holds and services, interest income is more

reliant on its borrowing costs and portfolio mix.

The bank earned higher fees as soaring markets boosted the

value of its assets. Easing interest rates and AI-fueled bullish

sentiments propelled major U.S. indices to multiple record highs

during the quarter.

Truist Securites analysts wrote in a note that investors are

weighing "market-driven positive fee trends" against

"disappointing NII".

The fall in net interest income was due to lower average

short-term interest rates and a shift in its deposit mix.

NII - the difference between what is paid out on liabilities

and earned on assets - fell 1% to $715 million in the quarter

ended September 30, missing analysts' expectations of nearly

$749.3 million.

Meanwhile, total fees rose 9%, as the the bank's assets

under custody and administration rose 10% to a record $51.7

trillion from a year earlier.

State Street's servicing fees rose 7.2% to $1.36, while its

management fees jumped 16.1%.

It reported a profit of $861 million, or $2.78 per share, up

from $730 million, or $2.26 per share a year earlier, compared

with analysts' estimate of $2.64 per share, according to data

compiled by LSEG.

Larger peer BNY also reported a higher profit on

Thursday, helped by fee growth.

State Street's expenses rose 5.5% to $2.43 billion in the

quarter, as the company spent $517 million on information

systems and communications, up 11.7% from the year-ago period.

(Reporting by Ateev Bhandari in Bengaluru; Editing by Shinjini

Ganguli)