July 15 (Reuters) - Custodian bank State Street reported STT.N a 3.8% fall in second-quarter profit on Tuesday, as higher employee compensation expenses offset fees earned from managing client assets.

State Street's expenses rose 11.5% to $2.53 billion in the second quarter, as it paid $1.28 billion for employee compensation and benefits, up nearly 16.5% from the year-ago period.

Shares of the company fell 3.3% in premarket trading.

After nearing bear market territory in early April, major U.S. stock indices ended June on record highs, buoyed by strong employment data, healthy consumer spending, and a softening of U.S. President Donald Trump's global trade war.

The bank's assets under custody and administration rose 10.6% to $49 trillion in the three months ended June 30 from a year earlier, driven by higher market levels and flows. Its total fee revenue, most of which it earns as a percentage of assets, climbed 10.7% to $2.72 billion in the quarter.

State Street reported a profit of $630 million, down from $655 million a year ago.

Market volatility from tariffs also saw investors fleeing the dollar. State Street's foreign exchange trading services revenue jumped 28% to $431 million in the quarter, as the greenback recorded its worst first half of the year since 1973.

The results come amid reports of consolidation in the sector. Last month, peer Northern Trust NTRS.O said it was "committed to remaining independent" in response to media reports of merger talks with BNY BK.N, the largest U.S. custodian bank.

Analysts have said a merger could set the stage for greater dealmaking across trust and custodian banks, which have seen heightened interest from crypto companies. Stablecoin giant Circle CRCL.N last month applied for a national trust bank charter.

State Street's shares had jumped over 12% this year as of last close, eclipsing a 6.6% rise in the benchmark S&P 500 index .SPX.

(Reporting by Ateev Bhandari in Bengaluru; Editing by Maju Samuel)

((Ateev.Bhandari@thomsonreuters.com;))