Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) is easily the biggest bank in the world still suffering from a financial crisis hangover. While its UK peer, Lloyds Banking Group PLC (NYSE:LYG) (LON:LLOY) has rapidly returned to health, Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) continues to be fought over by both the government and investors who claim to have been misled by the bank and are now seeking billions in compensation.

Royal Bank of Scotland RBS

RBS overstated its capital position and the risks

Indeed, the RBoS Shareholder Action Group is seeking up to £4 billion from the bank on behalf of 12,000 small and 100 institutional  investors, who claim that the bank misled them when proposing the rights issue back in 2007 to acquire troubled Dutch bank ABN Amro. Investors claim that Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) overstated its capital position and the risks that were contained within its balance sheet, concentrating instead on the deal with ABN without any concern for its investors or financial health.

Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS)’s troubles are not just limited to shareholder action. Political wrangling by the bank’s biggest shareholder, the UK government, is making the company’s future look extremely uncertain. The most recent proposal from the government is to split up RBS into a ‘good’ and ‘bad’ bank. The ‘bad’ bank will hold RBS’ estimated £30 billion of toxic loans and the good bank would be used to boost lending to small businesses and home buyers. However, according to Fitch, the costs associated with this split would far outweigh any positive synergies that would be achieved from the reorganization.

Osborne supported RBS’ board in the decision to push Hester out

Political pressure has also forced out the bank’s turnaround-in-chief, CEO Stephen Hester, who took the helm back in 2008. Hester has almost completely transformed the bank, reducing leverage and selling off key assets. Indeed, thanks to Hester’s leadership, the bank has returned to profitability for the first time since 2008 during the first half of this year. Nonetheless, UK Chancellor, George Osborne supported RBS’ board in the decision to push Hester out, less than a month after Hester stated that he was committed to the bank and determined to stay until his ‘mission’ of returning the bank to private investors hands was complete. The market reacted badly to Hester exit, which was announced after the close. RBS’ stock dropped 5 percent the next day.

Having said all that, despite interference from the UK government, Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) has almost returned to health, although there is still work to be done. As I have already mentioned above, for the first half of this year the bank reported a net income of £750 million, the first time a positive income has been reported since the record £25 billion trading loss back in 2008.

In addition, the bank reported a tangible net asset value of 446p per share at the end of 2012, which is a long way of the current stock price.

RBS is still a risky looking investment

Still, the biggest threat currently overhanging the bank is the UK government’s holding, which stands at around 64 percent of shares in issue. When these finally come to market (breakeven is at 500p) the company’s valuation is likely to become highly erratic for a short period of time. Although over the longer term, the lack of political influence is sure to boost the banks fortunes.

Overall, Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) is still a risky-looking investment. The political influences, shareholder legal action and possibility of a break-up just as the bank is returning to health will scare investors and customers alike away. To some extent, the banks future is even more uncertain now than it was back during 2008.