TORONTO (Bloomberg) - Canadian stocks declined a second day, led by financial companies on speculation their profits will be hurt by the fallout of the US mortgage crisis.

Toronto-Dominion Bank led a gauge of financial stocks to the steepest drop in five days following the collapse of a Kansas bank. Manulife Financial Corp. retreated after Credit Suisse Group forecast a $2.41 billion loss for rival insurer American International Group Inc. EnCana Corp., Canada's largest natural-gas producer, slumped after the fuel fell to the lowest in six months and Canadian Imperial Bank of Commerce reduced its oil and gas price forecasts.

"Banks continue to struggle," said Robert McWhirter, who oversees about $140 million at Selective Asset Management in Toronto. "The problems of the banking sector aren't over."

The Standard & Poor's/TSX Composite Index fell 1.2 percent to 13,288.96 in Toronto. Canada's equity benchmark, which derives three-quarters of its value from energy, materials and finance stocks, has dropped 12 percent from its June 18 record after commodity prices slumped on concern credit losses at banks and insurers will slow global growth and demand for resources.

Financial companies lost 1.8 percent as a group after Topeka, Kansas-based Columbian Bank & Trust Co. became the ninth US bank to collapse this year on bad real-estate loans and writedowns from lower home prices. AIG, the world's largest insurer by assets, tumbled in US trading on a Credit Suisse Group report that the company may lose $2.41 billion this quarter because of mortgage writedowns.

Toronto-Dominion dropped two percent to C$58.25, a five-week low. Canada's second-largest lender by assets has expanded in the US this year, spending $7.1 billion to buy New Jersey-based Commerce Bancorp Inc.

Manulife, which surpassed AIG to become the biggest North American insurer by market value, slipped 1.8 percent to C$36.11. Bank of Nova Scotia, which kicks off Canadian banks' fiscal third-quarter earnings reports tomorrow, fell two percent to C$47.64. Royal Bank of Canada, the nation's biggest lender by assets, slipped 1.9 percent to C$45.14.

Scotiabank, Royal Bank, Toronto-Dominion and the three other lenders that make up Canada's six biggest banks may say profit before one-time items fell by a median nine percent in the quarter, as revenue from equity markets slowed and costs rose for bad loans, according to estimates by RBC Capital Markets analyst Andre-Philippe Hardy.

Analysts at UBS AG also projected a nine percent drop in per-share earnings.