Two of the biggest U.S. custodial banks, Bank of New York Mellon Corp and Northern Trust Corp , reported disappointing earnings as declines in client assets depressed fees, sending their shares sharply lower.

State Street Corp was hit by similar factors but eked out a better-than-expected result.

Profit attributable to common shareholders fell 64 percent at Northern Trust, 57 percent at Bank of New York Mellon and 16 percent at State Street. Bank of New York Mellon also slashed its quarterly dividend by 63 percent, citing a desire to build capital.

As custodial banks, the three provide processing and back-office services to institutional clients. They are also large asset managers.

Although their nuts and bolts service-driven businesses have been seen as a relative oasis of stability compared with the mortgage and trading losses at consumer and investment banks, custodial banks are seeing results hurt because of lower business volume.

It's a challenging environment on the revenue side, Bank of New York Mellon Chief Executive Robert Kelly said in an interview.

Shares of Bank of New York Mellon and Northern Trust plunged by more than 10 percent. Shares of State Street were slightly higher.

At Bank of New York Mellon, first-quarter profit fell to $322 million, or 28 cents per share, from $746 million, or 65 cents per share, a year earlier. Excluding one-time items, profit was 53 cents per share, short of analysts' average forecast of 63 cents, Reuters Estimates said.

'DIFFICULT MARKET ENVIRONMENT'

The New York-based bank lowered its quarterly dividend to 9 cents per share from 24 cents, reflecting what Kelly called a difficult market environment.

State Street, based in Boston, said quarterly profit fell to $445 million, or $1.02 per share, from $530 million, or $1.35.

Operating profit was $1.04 per share, just above the average analyst estimate of $1.02. Unrealized losses on investments, which have worried analysts and investors for months, declined less than analysts had expected.

The company said unrealized mark-to-market losses in its investment portfolio and off-balance-sheet commercial paper programs, or conduits, stood at $9.5 billion, down only modestly from $9.9 billion at the end of the fourth quarter.

Despite changes in mark-to-market accounting rules, State Street's unrealized losses are down only moderately, said Isabel Schauerte, an analyst at Celent.

While this may well be reflective of continuing market illiquidity -- not deterioration in the credit quality of assets -- this distinction won't make much of a difference to concerned investors.

Assets under custody fell 24 percent to $11.3 trillion, while assets under management declined 29 percent to $1.4 trillion.

Since January, State Street's stock price has dropped 22 percent, while Bank of New York Mellon shares are down 1 percent and Northern Trust shares are up 11.5 percent.

Chicago-based Northern Trust said quarterly profit fell to $138.8 million, 61 cents per share, from $385.2 million, or $1.71. Analysts expected 96 cents.

Bank of New York Mellon has received $3 billion of taxpayer funds under the government's Troubled Asset Relief Program. State Street has received $2 billion and Northern Trust $1.5 billion.

In morning trading, Bank of New York Mellon shares were down 14.7 percent to $23.91, Northern Trust shares gave up 11.5 percent to $51.45, and State Street shares were up 17 cents to $30.82.

(Additional reporting by Joseph A. Giannnone and Christian Plumb; editing by John Wallace)

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