TORONTO (Bloomberg) - Canadian stocks fell for a second day, led by financial shares, as JPMorgan Chase & Co. cut its rating on US bond insurer MBIA Inc., housing starts slumped unexpectedly and a drop in oil drove down energy producers.

Financial companies decreased 2.5 percent as a group, the most of the 10 industries in the Standard & Poor's/TSX Composite Index, as Royal Bank of Canada, Bank of Montreal and Canada's three other major banks lost at least 1.7 percent. Suncor Energy Inc., the world's second-largest oil-sands producer, dropped three percent as crude prices slumped for a fourth straight day.

The S&P/TSX lost 164.20points, or 1.5 percent, to 10,629.47. The benchmark index has rallied 18 percent this year, including gains the past four weeks, as commodity prices rebounded and improving economic data spurred speculation that the global recession is easing.

"Bank stocks especially are looking like they're fairly expensive," said Stephen Carlin, who helps manage about C$9 billion as head of equities at Aegon Capital Management Inc. in Toronto. "There's this view that we're going to have to see something else to get the banks going right now because they're fully valued."

An index of banks in the S&P/TSX that's rallied 41 percent this year traded for 18.2 times its companies' earnings from the past 12 months on August 5, the highest valuation since 2003. The entire S&P/TSX traded at 15.4 times trailing profits at the end of last year, the most since September.

MBIA tumbled 13 percent to lead US financial companies lower after JPMorgan cut the shares to "underweight", saying credit losses may overwhelm capital at the biggest American bond issuer. Financial shares in the US also slumped after analyst Dick Bove of Rochdale Securities Inc. said he foresees a retreat in banks after the KBW Bank Index more than doubled since March.

The S&P 500 fell 1.3 percent to 994.35, with banks leading the retreat in the benchmark index for American equities.

Royal Bank dropped 2.4 percent to C$49.48, contributing the most to the S&P/TSX's decline. Shares of the nation's largest lender have fallen 3.5 percent this month after gaining 7.8 percent in July. The fourth-largest bank, Bank of Montreal, slipped 3.6 percent to C$50.76.