The credit crunch has fattened the balance sheet but skinned the profits of foreign banks operating in Australia.The profits of foreign banks operating in Australia fell in the March 2008 quarter, possibly reverting to more usual levels after inflated earnings during 2007.The 33 foreign banks that operate as branches reported a combined profit of $169 million in the March 2008 quarter, down from $192 million in the December 2007 quarter. The Australian Prudential Regulation Authority's quarterly review of bank earnings, published yesterday, is the only real insight into the performance of foreign banks, which mainly operate as branches and otherwise disclose little on their operations.On APRA's aggregate measure the profit margin for foreign banks fell to 10.9 per cent in the March 2008 quarter, down from 16.3 per cent in the December 2007 quarter. Margins ranged from between 15 per cent and 23.6 per cent during the prior four quarters.Earnings also eased for foreign banks operating as subsidiaries in Australia. The aggregate profit for the 10 foreign banks in this category fell to $825 million in the year to March 2008 down from $990 million in the year to March 2007, according to APRA.Return on equity fell to 9.2 per cent in the 12-month period, from 13.3 per cent in the prior period. ROE was 8.7 per cent in the March 2008 quarter, down from between 9.0 per cent and 10.5 per cent over the four prior quarters.The return on assets, however, was largely stable at around 0.6 per cent over each of the last four quarters.Foreign bank branches recorded asset growth of 38 per cent in the year to March 2008, while foreign bank subsidiaries recorded growth in assets of 19 per cent.