Back up a few feet and give us a shot of the whole wall and shower area but you are more than likely looking a complete gut and new shower.

Thank you chiming in. Does this help?

What is the material alongside and below the window? It appears to me to be a Marlite type product. How old is this? The window for sure needs to be replaced with a vinyl window and the wall quite possibly rebuilt so that being the case you may want to think about all new now.

Your bathroom was never meant to have a shower. The shower is an addition put on walls, that were never meant to have to be completely waterproof. It was originally just a bathtub, with no shower. Since most people want showers these days, it should all be redone to be waterproof and have the window waterproofed too. Windows in showers are not the best thing, and yours was meant to only be in a wall above the bathtub, where it would not get wet.

I think if you replace the damaged wood with a PVC product like Azek, and then caulk with white silicone caulk, you will solve the problem. The window is aluminum, and the sill appears to be marble, so they can survive in the moisture. I've lived in several houses with Marlite paneling for a tub surround. It doesn't last forever, but yours appears to be in good shape. Make sure it's well-caulked at all times. Once water gets into it, there's nothing that can be done to save it.