Lighter-than-anticipated trading hampered results at custody banks in the third quarter and is tempering expectations of a quick recovery.

Northern Trust Corp., State Street Corp. and Bank of New York Mellon Corp., which avoided the worst of the financial crisis by relying on asset servicing and asset management, fell short of analyst estimates last quarter because of a decline in fee revenue.

"These companies emerged from the stress of the past 18 months a lot quicker than other financial services companies, but this quarter we counted on them to move back to normal, and instead we got a bit of a reality check," said Marty Mosby of First Horizon National Corp.'s FTN Equity Capital Markets. "Thing just aren't moving as fast as we hoped."

The results were surprising, he said, since each increased assets under management and assets under custody. That typically leads to growth, but revenue stalled.

For example, at Northern Trust, which reported third-quarter results Wednesday, assets under custody rose 11% and assets under management increased 9% from a year earlier, but revenue fell 1% to $927.6 million. The Chicago company swung to a third-quarter profit of $187.9 million, or 77 cents per share, compared with a year-earlier loss of $148.3 million, or 66 cents per share, but analysts polled by Thomson Reuters expected earnings of 84 cents a share on $985 million of revenue.

"These companies are just not getting the customer activity that they did a few years ago," Mosby said. "People are investing and holding rather than moving assets around. That type of inertia is a result of people becoming more risk averse. That type of inertia is creating less in transaction fees."

Frederick Waddell, Northern Trust's chief executive, said during a conference call Wednesday that there has been a "mix shift" as investors move assets from equity to fixed-income products, which generate less fee revenue. He said investors that remain in equity products have shifted from active to passive products, which also generate less fee revenue.

William Morrison, Northern Trust's new chief financial officer, said that money market fund fees are also generating lower revenue and that this will be a "continuing issue in the short term."

Northern Trust wasn't alone.

Bank of New York Mellon reported Tuesday its assets under custody rose 7% and assets under management climbed 4%, from the previous quarter, but wealth management fee revenue rose 2% and custody fee revenue fell 4%.

State Street reported Tuesday its assets under custody rose 8% and assets under management rose 11% in the third quarter from the previous quarter. Though asset management fee revenue rose 13.5%, its custody fee revenue declined 3%. Mosby said State Street delivered strong results on the asset management side because the Boston company continues to introduce more lucrative exchange-traded funds and passive mutual funds.

It's natural to assume that companies would raise prices to make up for lost fee income, but Waddell said Northern Trust does not plan to increase its prices or adjust its balance sheet to compensate for lower revenue. "We are not going to penalize our clients for the interest rate environment," he said. "As interest rates go, so too will the fees. If they continue to stay at this level it's going to be a headwind for awhile."

Northern Trust continued cutting costs in the third quarter. Operating expenses declined 45% to $617 million from a year earlier. "We will tighten expense management as much as we can, but we won't tighten it blindly," Waddell said. "We want to keep in mind that we have a growing company" and that requires spending.

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