(Adds share price, analyst comment, details on expenses, fee revenue forecast)
Oct 23 (Reuters) - State Street Corp's adjusted expenses rose 4 percent in the third quarter, overshadowing a better-than-expected profit and sending the bank's shares down 4 percent on Monday.
The company's higher expenses come at a time when many U.S. banks have sharpened focus on cost-cutting efforts to boost profits in a low interest rate environment and amid sluggish loan growth.
The faster-than-expected increase in Boston-based State Street's operating costs is likely to concern investors, Sandler O'Neill analyst Jeffery Harte said.
On an adjusted basis, State Street's expenses rose 4.1 percent to $1.99 billion in the quarter ended Sept. 30, one percentage point higher than Sandler O'Neill's estimate.
The company said costs rose in part due to higher performance-based incentives paid to its employees.
Still, State Street's net income attributable to common shareholders rose 24 percent to $629 million, benefiting from higher interest rates.
On an adjusted basis, State Street earned $1.71 per share and topped analysts' average expectation of $1.62, according to Thomson Reuters I/B/E/S.
The bank's net interest income climbed 12.3 percent to $603 million, reflecting the market impact of the three rises in official Federal Reserve interest rates since last year.
State Street, which generates revenue mainly by managing and servicing investments, trading and providing research services, said its total fee income rose 7.8 percent to $2.24 billion.
For the full year, the bank said it expects total fee revenue on an operating basis to rise 6 percent to 7 percent.
Shares of State Street, the company that funded Wall Street's "Fearless Girl" sculpture, were down 3.3 percent at $95.81 in morning trading on Monday. The stock was the biggest drag on the S&P 500 financial index.
State Street's bigger rival, BNY Mellon, posted a 1 percent rise in adjusted noninterest expenses last week. (Reporting By Aparajita Saxena in Bengaluru; Editing by Sai Sachin Ravikumar)