Aug. 11 (Bloomberg) -- Canadian stocks fell for a second day, led by financial shares, as JPMorgan Chase & Co. cut its rating on U.S. 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 3 percent as crude prices slumped for a fourth straight day.

The S&P/TSX lost 164.20 points, 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 Aug. 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.

U.S. Financials Slump

MBIA tumbled 13 percent to lead U.S. 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 U.S. 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.

Canada’s three largest insurance companies also declined, with the third-largest, Sun Life Financial Inc., falling 5.2 percent to an almost four-week low of C$31.57. The biggest insurance, Manulife Financial Inc., slipped 1.6 percent to C$22.19.

Housing Starts

Construction began on 132,100 housing units on an annualized basis during July, down 4.1 percent from June, the Canada Mortgage and Housing Corp. said in a report today. The median economist forecast was 145,000.

Crude oil lost 1.6 percent to $69.45 in New York, closing below $70 for the first time this month as analysts forecast supplies would rise. Natural gas slumped 2.7 percent to $3.541 per million British thermal units.

Suncor tumbled 3 percent to C$34.91. TriStar Oil & Gas Ltd. fell 2.3 percent to C$13.34 after reporting a loss that exceeded the estimates of the two analysts surveyed by Bloomberg. Nexen Inc., the Calgary-based oil company that operates in the North Sea and Yemen, slipped 3.4 percent to C$22.49.

Eight of 10 industries in the S&P/TSX retreated. Health- care and telephone companies were the exceptions.

Osisko Mining Corp., a gold-exploration company, rose 7.1 percent to C$7.54 after Goldcorp Inc., the world’s second- largest producer of the metal, increased its stake in the company. Goldcorp now owns or controls about 13 percent of Osisko’s shares. Gammon Gold Inc. and European Goldfields Ltd., which both explore for bullion, gained 7 percent and 3.7 percent, respectively.

Better Investment

Bombardier Inc., the world’s third-largest maker of commercial jets, plunged 6.2 percent to C$4.06 after David Tyerman, an analyst at Genuity Capital Markets, cut his rating on the shares to “hold” from “buy.” Tyerman said CAE Inc., another company in the civil-aerospace business, is a better investment in part because its military business has better near-term prospects than Bombardier’s rail-transportation division. CAE added 1.4 percent to C$7.90.

Bombardier also dropped after saying it terminated an order agreement from MyAir.com. Fifteen regional jets were still to be delivered to the airline, whose flying permission was revoked by the Italian aviation authority.

Mining and energy royalty company Franco-Nevada Corp. climbed 2.6 percent to C$26.68 after reporting second-quarter earnings of 25 cents a share, excluding certain items, surpassing the average analyst estimate by 635 percent.

To contact the reporter on this story: Matt Walcoff in New York at mwalcoff1@bloomberg.net.

Last Updated: August 11, 2009 16:54 EDT