The risk of further weakness in U.S. financial stocks remains, says National Bank Financial in a research note.

NBF notes that news of asset writedowns tied to risky fixed income and subprime assets at financial institutions have relentlessly hit the tape lately.

“If CDO’s noteholders start to demand liquidation of their underlying assets, we could see more losses at financial institutions, which will be forced to mark their assets at their market value as required under FAS 157 which will come into effect on Nov. 15,” it says, adding that, “A change in accounting rules at a time when consumer sentiment is eroding has amplified investors’ nervousness.”

“How low can financials go? In times of turbulence, with less confidence in CEO guidance and Wall Street analysts’ expectations, keeping an eye on price-to-book in addition to the traditional P/E ratio can be a useful guide,” it says.

“A stock’s book value, for all its shortcomings, is a measure of the assets underlying a company’s equity – the value that shareholders would theoretically receive if the company were liquidated. The U.S. banks price to book value is trading slightly below its long-term average whereas the U.S. brokers’ ratio, at 2.2x, is still 28% above its long-term average,” NBF reports.

“However, both P/B ratios are still higher than they were during the last financial crisis (Savings & Loan), at the end of the 80s. In other words, financials still have room for downside,” it concludes.