Westpac's decision to cut its earnings forecast by $235 million to deal with customer refunds and compensation is not likely to be the last according to bank analysts.

Key points: Westpac says refunding customers for bad service and advice will cost it $235 million this year

Westpac says refunding customers for bad service and advice will cost it $235 million this year These costs only apply to half its adviser pool, so costs are likely to rise further

These costs only apply to half its adviser pool, so costs are likely to rise further It is Westpac's second profit warning in recent weeks after saying margins were tightening

Westpac slipped out the profit warning after the close of business last night — and ahead of the expected release of the banking royal commission interim report — noting costs associated with responding to the commission were not included in the adjustment.

It was the second profit warning issued by the bank in recent weeks after confirming its margins were narrowing rapidly last month.

Westpac said the increase in provisions cover customer refunds for advice fees charged by its salaried financial planners where no service was provided (fee-for-no-service) dating back to 2008.

"These include where advice services were not provided, as well as where we have not been able to sufficiently verify that advice services were provided," the bank said.

The provision also included refunds to customers who may have received inadequate financial advice from Westpac planners, as well as funds to resolve other "legacy" issues from a recent review of the bank's products.

This includes costs associated with recent litigation including Responsible Lending breaches and the bank bill swap rate rigging case.

Westpac chief executive officer Brian Hartzer said it was disappointing some of the bank's past practices had not lived up to appropriate standards.

"We are committed to fixing any issue identified, as well as ensuring that any customer affected has not been disadvantaged," Mr Hartzer said.

More misconduct related costs in the pipeline: analysts

However, leading bank analysts believe there will more provisions to come, both for Westpac and the other big banks.

"We believe that more provisions are highly likely," UBS analyst Jonathan Mott said.

Mr Mott maintained a sell rating on Westpac slashed his target price to $25 a share from $26. It is currently trading closer to $28.

Mr Mott noted the provisions only include salaried financial planners.

"It does not include the investigation into advice fees and inadequate financial advice by aligned planners, which are expected to be taken in financial year 2019," he wrote in a note to clients.

Mr Mott said earlier this year Westpac had 939 financial planners, evenly split between salaried and aligned planners.

"Evidence from overseas suggests that compliance and remediation costs are rarely limited to one year and tend to escalate over time," Mr Mott said.

All banks facing rising remediation costs

Morgan Stanley's Richard Wiles agree saying: "There is growing evidence that scrutiny of conduct is leading to civil proceedings, more customer remediation and fines" across the banking sector.

"While we had already factored in charges of $835 million and $500 million across the four majors in 2018 and 2020 respectively, this announcement confirms that fines and/or customer remediation could emerge earlier and be greater than we forecast," Mr Wiles said.

Mr Wiles said there was added uncertainty with Westpac as it was the only major bank still committed to its existing wealth management strategy.

The bank said it was "continuing to investigate and consider potential further cost associated with advice fees charged with our aligned partners".

Mr Wiles said this was likely to add to investor concerns and weigh on Westpac's share price for some time.

"We believe that Westpac and the other major banks will need to adjust their decision making to address social and governance considerations, and that a reduction in profitability may be required over the next few years in order to win back the support of key stakeholders and enhance long-term sustainability," Mr Wiles said.

Westpac sells funds business

In the meantime, Westpac announced it was selling its boutique funds management business, Ascalon Capital Managers. Ascalon had been parked inside Westpac subsidiary BT Financial Group, which deemed it to be a non-core asset.

Ascalon will be sold to local funds management group Geraldton Development Group for a so far undisclosed price.

Westpac was the weakest performer among the banks ahead of the royal commission report, down 1 per cent to $27.35 at 1pm (AEST).