(Reuters) -Bank of New York Mellon beat Wall Street expectations on Tuesday with a 5% increase in profits, as rising asset values boosted investment services fees, more than offsetting lower interest income for the world's largest custodian bank.

The oldest U.S. bank saw its assets under custody increase as hopes of a soft landing for the economy led to a market rally.

But income from interest on its portfolio of securities, loans and deposits fell. Lower volatility in foreign exchange markets also hurt profits.

"What we see is really strong underlying underpinnings for the U.S. economy," CEO Robin Vince said, echoing the sentiments of other executives in the finance industry.

He warned, however, that geopolitical tensions, uncertainty around the trajectory of interest rates and the United States fiscal deficit could have a destabilizing impact.

Rival State Street, which posted results last week, also saw assets under management drive fees, while net interest income declined.

BNY said net income applicable to common shareholders rose to $953 million, or $1.25 per share in the first quarter, up from $911 million, or $1.13 per share in the same period last year.

Adjusted net income during the quarter was $1.29 per share, while revenue rose 3%, to $4.53 billion - its highest-ever quarterly revenue on an ongoing operating basis.

Wall Street expected the lender to report adjusted earnings per share of $1.19 on $4.39 billion of revenues, according to LSEG data.

The bank said it had repurchased $988 million worth of shares and its board had authorized a new $6 billion stock buyback program.

Assets under custody or administration jumped 5%, to $48.8 trillion. Noninterest expenses grew 2%, to $3.18 billion.

INTEREST-RATE UNCERTAINTY

Investors have pared their expectations of rate cuts by the Federal Reserve after data last week showed U.S. consumer prices had increased more than expected in March.

The Fed's first rate cut is now expected in September, instead of June. Investors also see the central bank reducing its benchmark overnight interest rate by only half a percentage point this year, down from earlier rate-cut expectations that were as high as a full percentage point.

Vince said BNY was preparing for all eventualities and that further hikes by the Fed were "not impossible".

BNY's shares rose nearly 2% before the bell. They have climbed 5.8% so far this year, versus a 2.4% rise in the KBW Bank Index.

According to analysts, the bank has a more diversified business model compared to rivals and is less exposed to seismic market shifts.

(Reporting by Niket Nishant in Bengaluru and Paritosh Bansal in New York; Editing by Pooja Desai)