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🧐 Thoughts ‘ US Agri Banks and 'I don't want your data problem’
🗞 Relevant News Updates from Nik Milanovic, Efi Pylarinou, Ecozen, OneOrder, AquaConnect
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US Agri Banks and 'I don't want your data problem
In my summation of 2022, I finished of the year by talking about Financial Value Chains. This is something I continue to learn more about, especially in the US, one of the key markets driving Agri Fintech globally and where there are several supporting factors at play, especially when considering the Agri Bank landscape.
A good start point is the American Bankers Association data on the Top 100 Agricultural Banks by Dollar Volume as it outlines the key players in the commercial bank sector (excluding the Farm Credit System) and the volumes involved. Unsurprisingly, giants such as Bank of America and Wells Fargo set atop this list, but only with farm loan concentrations of 0.5% of total loans, with John Deere Financial taking up the third position with $3.3bn in loans to the Agriculture sector (81.1% of their loans).
The data the ABA publish is fascinating as you can look at both Top 100 by Dollar Volume and also Top 100 by Farm Loan Concentration but I have included the former below. 👇 (John Deere Financial score high up in both).
As I also pointed previously, there is a long tail of Agriculture specialist banks in the US, with the FDIC giving this designation to 1,061 institutions.
Writing this from Europe where the banking landscape is much more concentrated prompts me to think about consolidation in the sector.
Consider this chart which outlines the number of banks in the US over time. It is moving in one direction i.e. down and to the right (you can view the underlying graph here.)
This doesn't reflect anything wrong with the system - bank failures are uncommon - but is mostly due to bank consolidation via mergers and acquisitions (M&A). Unofficial sources such as PCBB cite 173 mergers in 2021 and 164 in 2020, which is a natural attrition rate of about 4% of total institutions. In short, this decline in bank population will continue as discussed here by the St Louis Fed.
To view this in action, I took a quick look at the Bank of Montreal (BMO Harris in the US) acquisition of Bank of the West which is still awaiting confirmation, but will see BMO leap to take Bank of the West's No.3 position in the Top 100 Farm lenders ranking, from No. 37 as at the end of September 2022.
In another Agri relevant transaction, US Bank (No. 8 on the list above) have also acquired MUFG (No.24) in another major consolidation which directly impacts the Top 100 Farm lenders.
However, in the BMO investor presentation, they cited two specific synergies, which I thought were relevant to this conversation. Firstly, in order to enhance BMO's existing footprint, the BOTW assets were "highly complementary". Secondly, both companies shared a 'digital first strategy'.
The CEO elaborated further on the complements in an investor call describing how BMO would increase their commercial loan book by 30% in the transaction and specifically citing the Ag lending book as one sensible part of the combination.
In the sectors where we have really good overlap, for example, Food and Ag, which you all know we've been very good at for a very long period of time, they're in the West Coast, we're in the Midwest. They're deeper in protein, we're deeper in grain. So there's a really complementary fit there. That's the commercial side.
In relation to the latter issue (i.e. digital strategy), the acquisition was viewed positively due to the ongoing BMO digital first strategy and the high digital adoption rates seen by BOTW among their clients.
➡️ Technology in M&A is gaining increasing importance and I will develop this point in the next section "I don't want your data problem"
A third facet to this deal, which I feel is under reported is sustainability. BMO cite BOTW as a leader in sustainable banking. In isolation, this appears insignificant.
However, the Canadian Financial Regulator, BMO's home market, has announced a plan to increase regulatory capital requirements for climate risk, similar to many markets. Will sustainability become a key issue in bank M&A? It makes some sense and this could work in favour of an Agri Bank or Fintech which is climate smart. 🤔 ... for another day.
But technology IS a current issue.👇
'I don't want your data problem'
I'm joining several ideas together here but the last point I would like to make relates to the role of technology in ongoing bank consolidation set out above.
Alloy Labs recently suggested the end of the M&A super highway was getting close and the main reason for this is a change in priorities of buyers. Earlier deals were driven by scale but most of the big deals have been done so now they need to be smarter and consider accessing scale via technology. From the article:
There are 4 reasons traditional mergers and acquisitions are slowing down, each in its own a right an impediment to getting a deal done:
I don’t want your branches
I don’t want your core (and data) problem
I don’t want your customers
I don’t want your people
From an Agri Fintech perspective, I think this creates an interesting landscape and opportunity - what do you think?
Technology will increase the attractiveness of any bank for a buyer, especially in the Agriculture sector. Currently, this represents a unique and timely opportunity for US based Agri Fintech companies.
In fact, I would broaden the opportunity to non US based Agri Fintech companies. As Agricultural Finance starts to embrace technology - globally - some of the ecosystem plays and data providers from other markets will become increasingly relevant.
Agri Fintech has had a very positive newsflow to end 2022 continuing right into 2023.
⦿ Nik Milanovic, a prominent early stage Fintech investor posited that Agricultural Finance would be the next Fintech revolution. His main reasons were XX, YY and he cited numerous examples. Thanks Nik 🙏👏
⦿ Efi Pylarinou, another major Fintech content curator also posted on LinkedIn to discuss the yawning gap in SME credit in the Agri sector in developing countries. You might also like my write up on the same topic here.
⦿ Aquaconnect raised $14m Series A round from investors such as as Lok Capital, Louis Dreyfus Company Ventures
⦿ Ecozen, the IOT enabled hardware provider raised $10m as part of its Series C round from Nuveen Global Fund
⦿ CropIn raised $14m Series D, at a $91m valuation (according to Entrackr), with participation from existing investor Chiratae and new investor Google, among others. CropIn have digitised 16m acres of farmland across 92 countries.
⦿ OneOrder, a restaurant management platform based in Egypt has secured a $3m Seed round to expan in the country and the wider region.