The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Stephen Gandel

NEW YORK, June 4 (Reuters Breakingviews) - Wells Fargo WFC.N wore a cap about as stylishly as it could have hoped. The Federal Reserve imposed a $2 trillion limit on the assets the fourth-largest U.S. lender could gather in 2018, the result of a scandal over employees opening fraudulent accounts for clients. Over the next seven years, the bank had to forego growth and make tough choices. Yet its shares handily outperformed most rivals of late. Now that regulators are taking Wells Fargo’s cap back off, the risk is that it blends in with the crowd.

By choking expansion, regulators ensured that change was not optional. The wave of scandal toppled first boss John Stumpf and then Timothy Sloan. Current CEO Charlie Scharf, hired in 2019, promised a bigger transformation.

Speaking to CNBC on Wednesday, Scharf called the Fed’s move “punitive,” but ultimately necessary and effective. There’s some truth to his concession. The asset cap forced the bank to sell off more volatile businesses, like its mortgage unit, and avoid chasing the most costly deposits. Wells Fargo now boasts the lowest average annual expenses on its deposits of any large bank. Its ratio of operating costs to revenue stands at 66%, equivalent to Bank of America BAC.N despite having to spend heavily on compliance.

The asset limit also prevented over-exuberance. Early in the pandemic, a wave of deposits flooded its peers. Many responded by buying up then-low-yielding securities that turned into big unrealized losses - roughly $100 billion at Bank of America alone - as the Fed cranked up rates.

All told, Wells Fargo’s shares have risen 62% since the start of the pandemic in February 2020, far outpacing its peers except for JPMorgan JPM.N. Now, it’s time to decide how and whether to chase the growth it had previously missed.

Scharf singles out credit-card lending and investment banking as ripe for expansion. The rub is that this will make Wells Fargo look a lot like its biggest rivals, potentially turning off investors who preferred lower exposure to international markets and Wall Street. Additionally, driven by the need to work down its capital, the lender spent over $31 billion on stock repurchases in the last two years. Any excess is now likely to be turned inwards, spent on boosting its business. That could help in the long run but is a drag for shareholders today.

Moreover, maintaining his bank’s sterling efficiency is no longer quite as existential for Scharf. He has managed well through a crisis period, returning Wells Fargo to an even keel. The challenge now is to find growth without unduly chasing the herd.

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CONTEXT NEWS

Wells Fargo announced on June 3 that the Federal Reserve had removed limits on its growth, first imposed in 2018, that capped its total assets at $1.95 trillion. The cap was imposed following revelations that the bank’s employees had fraudulently opened accounts for clients without their knowledge.

(Editing by Jonathan Guilford; Production by Pranav Kiran)

((For previous columns by the author, Reuters customers can click on GANDEL/ stephen.gandel@thomsonreuters.com))