Lehman shares were up 4.1 percent at $20.62 in extended- hours trading after Morgan's initiation of Lehman shares at an "overweight" stock rating.

"We think near-term risk of incremental write-downs is balanced by solid liquidity and capital footing," wrote analysts Patrick Pinschmidt and Avi Ghosh. "The firm's ability to weather near-term market headwinds and return to respectable return on equity generation should help the shares trade closer to book value."

The Morgan analysts expect ROE to rise from 3 percent in the second half of this year to 12 percent in 2009 and 14 percent in 2010 -- even as debt trading declines 28 percent versus its peak.

"A return to profitability amid a healing credit market should drive valuation close to book value," they added.

(Reporting by Jennifer Ablan in New York; Editing by Jan Paschal)